The U.S. Presidential election has received tremendous attention over the recent past and it appears that media coverage will continue to reflect a heightened approach to all developments. From a stock market perspective, however, the past week has resembled an uneventful political landscape that has embraced broad gains across the entire U.S. equity market (not just the S&P 500). Regardless of investors’ preference for a specific political party, the gains we have experienced are a welcoming outcome for all market participants. If you are wondering why, the answer can be found in your local county and state races for U.S. Congress, which have resulted in an aggregate stalemate between the U.S. House and the U.S. Senate. Based on the most recent data from the Associated Press, the Republican Party is projected to control the U.S. Senate while the Democratic Party may control the U.S. House of Representatives. As we decipher this information from a pure risk management standpoint, mainly as it relates to investment allocations, we remain optimistic over the next two years when assessing global equity markets. A stalled Congress has historically produced minimal uncertainty for stocks given the immense difficulty for the leadership in the White House to fully implement its intended policies. This occurs regardless of who sits in the White House! With the prospects of minimal adjustments to the tax code under this scenario, along with the prospects of minimal adjustments to other broad federal policies, businesses are more likely to invest their capital and hire more labor. The known lack of uncertainty provides a near-term boost to sentiment for business owners and large corporations. Based on this data set, it is our belief that we are now seeing a secular shift that is presenting the next cycle of economic growth. Both domestically and abroad.
With that in mind, I want to focus on an additional catalyst that may fuel a faster recovery in the value sector of the U.S. equity market as well as the broader economy. That catalyst is the prospect of a COVID-19 vaccine. Its development has been a work in progress for over twelve months and recent announcements from Pfizer, and Novavax, indicate a promising outlook. We believe such an outlook benefits global equity markets beyond just the top-heavy nature of the growth sector, which is an outcome that has provided ample evidence over the past month. It is prudent to keep in mind, however, that potential upside in the coming months is not possible without some added form of volatility. The normal cycle of market swings is not something that will automatically disappear simply because a vaccine may have been developed, or simply because Congress remains divided. Since the stock market and the economy are separate entities that react differently to the same set of news, the prospects of economic growth may, or may not, be reflected in the stock market in the immediate short-term. One area we are excited to focus on is the prospects of gains within the small and midcap sectors of the U.S. equity market. These areas have been hit hard due to COVID restrictions and we believe any added stimulus, or vaccine developments, may appropriately boost consumer and business sentiment in those segments. We also believe this to be the case for smaller company exposures on an international basis as well as country specific rotational allocations.
As we look ahead, it is important to stress the fact that the U.S. Presidential Election will continue to remain at the forefront, and it may likely produce unwarranted uncertainty for the stock market. If, and when, that occurs, it is critical to ignore it as a factor for gauging your desire to maintain equity market participation. Instead, focus on the underlying factors that have an ability to impact markets. Those are things like consumer sentiment due to stimulus efforts, vaccine developments, forward earnings estimates, as well as pinpointing international stimulus efforts to combat COVID-19. There are many things occurring around the world that do not revolve around the U.S. presidency and we are excited for such opportunities. And if the U.S. Congress does materialize into a stalemate, as is currently projected, we believe the next two years remain ripe for equity market participation.
Edison Byzyka, CFA – Chief Investment Officer – Credent Wealth Management
Investment advice offered through CX Institutional, a registered investment advisor.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly. The economic forecasts set forth in the presentation may not develop as predicted.
All return data sourced from Bloomberg.
All other data soured from Bloomberg, through the release of monthly figures from the Department of Labor, Bureau of Economic/Labor Statistics, U.S. Census Bureau, or from the Federal Reserve and any of its affiliated regional locations.
Small Business Optimism sourced through NFIB. Small business hiring plans sourced through NFIB. Consumer sentiment sourced through the University of Michigan.
Earnings data sourced through Bloomberg Intelligence and through Bloomberg’ earnings analysis composites. Interest rate cut/rise probabilities are sourced from Bloomberg’s tracking of futures contracts tied to the Federal Funds interest rate.
Manufacturing data – Markit PMI – Bloomberg
The Standard & Poor’s 500 Index is a capitalization weighted index of 500 stocks designed to measure performance of the broad domestic economy through changed in the aggregate market value of 500 stocks representing all major industries.