Four Factors for Investors to Watch Post-Election Day | Lord Abbett
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Economic Insights

While the outcome of the Presidential Election is yet to be determined, Lord Abbett Partner and Director of Strategic Asset Allocation, Giulio Martini, provides his thoughts on the potential implications of this momentous vote. 

Read time: 4 minutes

Taking a broader view of the macro-economic situation, we believe there are four key factors investors may want to keep in mind. First, the unknowns. Topping that list, of course, is the COVID-19 pandemic, the likelihood of a vaccine in the near-term, other therapeutic solutions and public health measures that may be implemented to combat the virus. We believe a return to normal consumer behavior, especially within certain segments of the economy that have been hardest hit by the pandemic such as leisure and entertainment, will be dependent upon the efficacy, availability and swift distribution of a vaccine. Significant delays in developing effective vaccines and treatments could forestall a complete economic recovery.

A second significant unknown is U.S. fiscal policy going forward. The strong policy response to economic uncertainty that we saw in March and April bolstered economic activity in the second quarter. However, those programs have basically come to an end and additional stimulus programs are at an impasse pending the election outcome.  Assuming an election resolution is forthcoming and additional stimulus will follow, it is the size and timeliness of any additional fiscal support that could either sustain economic growth or provide a "too little, too late" response, similar to the inadequate measures in 2009 following the financial crisis.

 

Figure 1. Four Factors to Watch After Election Day


 

Positive Economic Forces at Play

There are also positive forces at play that are counterbalancing the negative effects of the uncertainty we’ve just discussed. Most notably, we have seen positive corporate earnings reports for the second quarter that have surpassed analysts’ estimates on a magnitude not seen since the early 1990’s. Based on data that gives us an indication of activity in the third quarter, we could see a continuation of large positive earnings surprises for that period as well. Within this framework, however, larger companies have been able to adapt and innovate their business models in response to the new environment, a benefit to shareholders, whereas smaller and independently owned enterprises have been more vulnerable to the financial and behavioral effects of the pandemic.

Additionally, China has been a meaningful positive influence on the global economy and has essentially made a full recovery following the pandemic’s rise earlier in the year. China gross domestic product (GDP) growth in the third quarter of this year, posted at +4.9%, surpassed pre-pandemic growth rates. As the second largest economy in the world and the main engine of global economic growth over the past several years, the recovery in China is not only providing economic support to weaker segments of the global economy but is also an indication to the rest of world that economic growth, and the activity that it necessitates, is possible within the current COVID-19 environment.

We have also seen a significant strategic shift in investment allocations in response to the uncertain COVID-19 environment. Investors’, both institutional and retail, move towards conservative positioning has reduced equity exposure to below average levels, a positive implication going forward as cash reserves and rebalancing could provide support as assets are redeployed. Sustained growth in corporate earnings could further offer hungry investors the necessary evidence they crave to invest cash reserves that have been sitting on the sidelines.

Historical Market Trends Surrounding Elections Past

In examining periods leading up to and following federal elections since World War II, we have found that financial market weakness and volatility abound in pre-election periods. Subsequent to an election outcome, market strength returns as the uncertainty is resolved. Contrary to certain theories, market strength followed the election regardless of which political party gained traction. In fact, the financial markets performed slightly better in periods where the election resulted in a government divided among parties than in elections resulting in a unitary government.  Notably, however, two recent episodes, the election in 2000 and 2008, produced significantly different market responses. The 2000 Presidential election did not produce a winner until mid-December following a vote re-count in Florida, prolonging the uncertainty facing those markets. The election in 2008, while producing a clear outcome, occurred during the worst financial and economic crisis since the 1930’s and the resulting market sell-off continued on recession uncertainty, not election uncertainty. We believe federal election uncertainty could persist this year as well given the historic environment, manual ballot counting and tight results we’ve seen so far.

Post-election, once a victory has been undisputedly reached, there are varying market implications that could come into play depending on the candidates’ stated agenda. But campaigns are managed and executed based on long and often impracticable wish-lists. The reality of governing is quite different. Regardless of who enters or stays in the White House, we believe priority must be given to dealing with the current global health crisis followed by an effective fiscal stimulus plan that bridges the gap between now and when the COVID-19 crisis is over and normal economic and social behavior resumes.

Tackling those two priorities is a huge undertaking for any administration, but we believe these two issues should take precedent over additional initiatives. There are, however, several areas where we would also expect to see implications based on whether a Democrat or a Republican claim the White House. We would anticipate likely projects coming out of green infrastructure, tax reform due to the significant rise in the federal budget deficit and a focus on fiscal restraint from a Biden administration. We would expect a Trump administration to provide more of a status quo in terms of fiscal policy and budget deficits, post the COVID-19 crisis. It is also important to note that this election could determine the size of the next fiscal stimulus package, depending on not only the outcome in the White House but also the Senate.  

The good news here is that once the election concludes, and there is a clear answer regarding who will reside in the White House and who controls the Senate, speculation over market implications will also subside. What history has shown us is that the financial markets generally respond favorably to the resolution of uncertainty following an election, regardless of which party gains or loses control. More importantly, investment and asset allocation decisions should be based on a longer term, fundamental discipline as opposed to the short-term effects of election results.

 

Gross Domestic Product (GDP): The monetary value of all the finished goods and services produced within a country's borders in a specific time period, though GDP is usually calculated on an annual basis. It includes all of private and public consumption, government outlays, investments and exports less imports that occur within a defined territory.

Earnings per Share (EPS) is the portion of a company’s profit allocated to each share of common stock.

No investing strategy can overcome all market volatility or guarantee future results. Statements concerning financial market trends are based on current market conditions, which will fluctuate.

Forecasts and projections are based on current market conditions and are subject to change without notice. Projections should not be considered a guarantee.

Statements concerning financial market trends are based on current market conditions, which will fluctuate. There is no guarantee that markets will perform in a similar manner under similar conditions in the future.

This article may contain assumptions that are “forward-looking statements,” which are based on certain assumptions of future events. Actual events are difficult to predict and may differ from those assumed. There can be no assurance that forward-looking statements will materialize or that actual returns or results will not be materially different from those described here.

The opinions in the preceding commentary are as of the date of publication and are subject to change. Additionally, the opinions may not represent the opinions of the firm as a whole. The document is not intended for use as forecast, research or investment advice concerning any particular investment or the markets in general, and it is not intended to be legal advice or tax advice. This document is prepared based on information Lord Abbett deems reliable; however, Lord Abbett does not warrant the accuracy and completeness of the information.

Lord Abbett Distributor LLC, FINRA member.

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