2020 U.S. Election: Implications for Equities | Lord Abbett
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Equity Perspectives

Lord Abbett portfolio managers discuss how the 2020 U.S. vote could potentially influence key areas of the equity market.

Read time: 4 minutes

The U.S. presidential race between Donald Trump and Joe Biden went down to the wire, with no clear winner as of the morning of November 5. Meanwhile, the voting pointed to continuation of a divided U.S. Congress, with Democrats holding the House and Republicans maintaining control of the Senate.  What might this mean for equity investors?

In August, we surveyed Lord Abbett investment professionals in our equity groups for their thoughts on what the 2020 election might mean for the asset classes they follow. Here, we present an update of those views through November 4.

Once again, our contributors included Partner and Portfolio Manager Thomas O’Halloran; Managing Director and Portfolio Manager Darnell Azeez; and Portfolio Managers John Hardy, Jeffrey Rabinowitz, and Servesh Tiwari.  

Innovation Growth Equities:  Irrespective of whether Biden or Trump wins this extremely close race, we still have divided government with the Republicans holding on to the Senate. Accordingly, the odds of a surprisingly strong economy (inspired by either blue wave spending or a supply side boom) are now less likely. With divided government already determined, we believe politics will now be a secondary factor to the prevalence of the powerful megatrends shaping the future economy. We believe that innovation growth equities, as exemplified by the work from home stocks, continue to have the potential for strong performance as the technological revolution continues to unfold.

Durable Growth Equities: We believe the areas likely to be in focus in the wake of the 2020 election are U.S. tax policies, regulation of mega-cap tech companies, the U.S. relationship with China, healthcare reforms, and the potential for a boost in infrastructure spending.

A prospective Democratic sweep of the White House and Congress now seems less likely.  A split Congress hence reduces the likelihood of bigger policy moves in areas such as taxes and healthcare we believe; this contrasts with Trump's early presidency, where Republican control of the White House and Congress enabled tax reform and some rollbacks of the previous administration’s healthcare reform legislation.  We think a split Congress will make tax reform and changes in healthcare policy unlikely.  That said, approaches to COVID response (e.g. testing) could be stepped up in a Biden administration.

An infrastructure spending plan has been supported by both parties, but political considerations may make reaching an agreement on how to fund the effort difficult.

Post-election, there could be some bipartisan agreement on a further examination of the biggest technology names for privacy or antimonopoly concerns, so this issue likely will remain with us for some time. All else equal, a prospective Biden presidency could somewhat intensify the nature of the investigations over time.   

China is a wildcard. We know Trump has taken a harder line on Beijing in terms of trade, technology, and security; it is not clear that Biden would take a softer approach, but it seems likely that he would look to repair aspects of the relationship and perhaps use other diplomatic methods such as working more collectively with allies in place of leveraging unilateral tariffs to achieve his goals. 

How have we responded to these developments? Given the likelihood of a split Congress, we believe large policy changes in the next two years are now less likely, so we are not anticipating making major shifts to our portfolio positioning due to the election at this time.  As we move past the election uncertainty, we foresee remaining in an environment of low interest rates, moderate growth, and low inflation, which we believe will offer many opportunities for growth investors, with our focus continuing to be on identifying durable businesses that grow and are reasonably valued. 

Dividend Equities: We continue to believe the near-term issues for the overall U.S. equity market are going to continue to be COVID-related, with investor attention remaining fixed on possible new outbreaks, the likelihood of renewed shutdowns, and any progress made on the medical side. We believe that there is some likelihood of a rebound with cyclicals as we get clarity on potential “back to normal” outcomes.

The still-unresolved Presidential election brings forth several scenarios, including the potential for a corporate tax break rollback, infrastructure stimulus plans of various sizes, the possibility of a lessening in tensions for U.S. relationships with China and other nations. In addition, there could be a heightened focus on “public option” healthcare plans, pressures on drug pricing, stepped up oversight of major banks, and stricter environmental regulations.

With that being said, we do not believe the election will have a material impact on companies’ dividend policy. However, we do think some industries may face structural headwinds on profitability. In our view, quality companies—those with long-term histories of consistent earnings growth and dividend payments--have the potential to overcome any election-related headwinds. As such, we think maintaining a focus on stock selection, while avoiding investment decisions based purely on election outcomes, is a sensible approach in the aftermath of the 2020 vote, and beyond.

Value Equities: This year’s U.S. election has the potential to affect many companies within the value realm. While there are still many unknowns with multiple states yet to be called, as of the morning of November 4, the odds were favoring favor Biden to win the Presidency and for the GOP to retain control of the Senate. We stated several weeks ago that control of the Senate would likely be more influential in determining which sectors and companies would benefit on a relative basis post-election and that appears to be holding true with the caveat being that there are still unknowns and nothing has been determined at this time.

Under a second term for President Trump, we would likely see “more of the same,” including maintaining the lower corporate tax rates put in place in 2017 and a continued emphasis on deregulation. Under a Biden administration, again assuming the Senate were to change hands, we believe it would be likely that a significantly different set of priorities could emerge, including expanding healthcare coverage, increasing corporate taxes, heavier regulation, and larger fiscal stimulus. Assuming a Biden win, and that the GOP retains control of the Senate, we are much less likely to see significant legislative action, though there are things the Executive branch can do around regulation that could impact companies in the financial, energy, and other value sectors. However, it would seem a significant overhaul of the healthcare system would be off the table for the time being, same with higher corporate taxes, and that the impact from fiscal stimulus, infrastructure spending, and renewables development would be more muted.  

We’d like to reiterate a point we made last time: We tend to evaluate opportunities on a single-stock basis and do not make any wholesale portfolio positioning decisions based on political outcomes. While many of our portfolio companies certainly will be affected one way or another, we continue to look for idiosyncratic opportunities that are attractively valued under most potential outcomes.

 

A Note about Risk: The value of investments in equity securities will fluctuate in response to general economic conditions and to changes in the prospects of particular companies and/or sectors in the economy. While growth stocks are subject to the daily ups and downs of the stock market, their long-term potential as well as their volatility can be substantial. Value investing involves the risk that the market may not recognize that securities are undervalued, and they may not appreciate as anticipated. Smaller companies tend to be more volatile and less liquid than larger companies. Small cap companies may also have more limited product lines, markets, or financial resources and typically experience a higher risk of failure than large cap companies. 

No investing strategy can overcome all market volatility or guarantee future results. 

Dividends are not guaranteed and may be increased, decreased, or suspended altogether at the discretion of the issuing company.

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

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.

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 material is provided for general and educational purposes only. The examples provided are for illustra­tive purposes only and are not indicative of any particular investor situation.

The information provided herein is not directed at any investor or category of investors and is provided solely as general information about our products and services and to otherwise provide general investment education. No information contained herein should be regarded as a suggestion to engage in or refrain from any investment-related course of action as Lord, Abbett & Co LLC (and its affiliates, “Lord Abbett”) is not undertaking to provide impartial investment advice, act as an impartial adviser, or give advice in a fiduciary capacity with respect to the materials presented herein. If you are an individual retirement investor, contact your financial advisor or other non-Lord Abbett fiduciary about whether any given investment idea, strategy, product, or service described herein may be appropriate for your circumstances.

The opinions in this commentary are as of the date of publication, are subject to change based on subsequent developments, and may not reflect the views of the firm as a whole. The material is not intended to be relied upon as a forecast, research, or investment advice, is not a recommendation or offer to buy or sell any securities or to adopt any investment strategy and is not intended to predict or depict the performance of any investment. Readers should not assume that investments in companies, securities, sectors, and/or markets described were or will be profitable. Investing involves risk, including possible loss of principal. This document is prepared based on the information Lord Abbett deems reliable; however, Lord Abbett does not warrant the accuracy and completeness of the information. Investors should consult with a financial advisor prior to making an investment decision.

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