Red, Split or Blue?
In these tumultuous times when society is fighting both a global pandemic and managing tensions around racial and economic inequality, Americans are heading to the polls to determine their leader for the next four years. While Joe Biden currently leads in the polls, it’s important to remember that polls have been wrong three times in the post war era (1948, 1976 and 2004). As is our process with most “known unknowns,” we look at the various outcomes and how they are likely to affect the economy, capital markets and our portfolios.
The best-case scenario for the markets is to have a clear winner. Stock markets are likely to increase because there is less uncertainty or stay neutral because that outcome is already priced in. A contested election would heighten uncertainty and lead to prolonged volatility. Also, while the president does hold a great deal of power, the outcome of the Senate and House elections are equally important. To help understand these implications, we’ve examined three scenarios of what could happen once a winner is determined.
Split decision
In a divided government, gridlock will persist and meaningful legislation will be difficult to pass. This could also affect appointments to key posts like the Chair of the U.S. Federal Reserve and the implementation of regulations. In this scenario, the impact to the economy would be more muted but fiscal spending and a growing deficit will continue to support a recovering economy.
Blue sweep
Democratic control of the House, Senate and the Presidency would feature a progressive agenda of more taxes and spending. Taxes will likely focus on corporations and high earners, and spending will be directed to health care, infrastructure and clean energy. The winners in this case would be construction materials, renewable energy and non-luxury retailers. We could also see an increase in regulation focused on energy, finance and possibly the technology sector. Stricter regulations may hurt the energy and banking sectors, but higher interest rates and inflation would provide some offsetting impacts. Increased immigration and less tariff threats could counterbalance the impacts of regulation on the tech industry.
Red sweep
While this is the most unlikely outcome according to the polls, it still warrants some consideration. Expect much of the same as we saw in 2017: tax cuts, deregulation and foreign policy unilateralism. We’d also likely see some volatility immediately following the election as this outcome is not priced in.
In summary, an election-related spike in volatility is likely in the near term, while more fiscal spending regardless of the outcome bodes well for markets next year. Looking beyond the election, the course of COVID-19 and monetary policy will ultimately have an impact on the markets as well. We continue to position our portfolios prudently and stand ready to take advantage of the opportunities that volatility creates.
By Alfred Lam, CFA, Senior Vice-President and Chief Investment Officer and Marchello Holditch, CFA, Vice-President and Portfolio Manager CI Multi-Asset Management
This document is intended solely for information purposes. It is not a sales prospectus, nor should it be construed as an offer or an invitation to take part in an offer. This report may contain forward-looking statements about one or more funds, future performance, strategies or prospects, and possible future fund action. These statements reflect the portfolio managers’ current beliefs and are based on information currently available to them. Forward-looking statements are not guarantees of future performance. We caution you not to place undue reliance on these statements as a number of factors could cause actual events or results to differ materially from those expressed in any forward-looking statement, including economic, political and market changes and other developments. United pools are managed by CI Investments Inc. Assante Wealth Management is a subsidiary of CI Investments Inc. Neither CI Investments Inc. nor its affiliates or their respective officers, directors, employees or advisors are responsible in any way for damages or losses of any kind whatsoever in respect of the use of this report. Commissions, trailing commissions, management fees and expenses may all be associated with investments in mutual funds and the use of the Asset Management Service. Any performance data shown assumes reinvestment of all distributions or dividends and does not take into account sales, redemption or optional charges or income taxes payable by any securityholder that would have reduced returns. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. Please read the fund prospectus and consult your advisor before investing. Assante Wealth Management and the Assante Wealth Management design are trademarks of CI Investments Inc. CI Multi-Asset Management is a division of CI Investments Inc. This report may not be reproduced, in whole or in part, in any manner whatsoever, without prior written permission of Assante Wealth Management. Copyright © 2020 Assante Wealth Management (Canada) Ltd. All rights reserved.
In these tumultuous times when society is fighting both a global pandemic and managing tensions around racial and economic inequality, Americans are heading to the polls to determine their leader for the next four years. While Joe Biden currently leads in the polls, it’s important to remember that polls have been wrong three times in the post war era (1948, 1976 and 2004). As is our process with most “known unknowns,” we look at the various outcomes and how they are likely to affect the economy, capital markets and our portfolios.
The best-case scenario for the markets is to have a clear winner. Stock markets are likely to increase because there is less uncertainty or stay neutral because that outcome is already priced in. A contested election would heighten uncertainty and lead to prolonged volatility. Also, while the president does hold a great deal of power, the outcome of the Senate and House elections are equally important. To help understand these implications, we’ve examined three scenarios of what could happen once a winner is determined.
Split decision
In a divided government, gridlock will persist and meaningful legislation will be difficult to pass. This could also affect appointments to key posts like the Chair of the U.S. Federal Reserve and the implementation of regulations. In this scenario, the impact to the economy would be more muted but fiscal spending and a growing deficit will continue to support a recovering economy.
Blue sweep
Democratic control of the House, Senate and the Presidency would feature a progressive agenda of more taxes and spending. Taxes will likely focus on corporations and high earners, and spending will be directed to health care, infrastructure and clean energy. The winners in this case would be construction materials, renewable energy and non-luxury retailers. We could also see an increase in regulation focused on energy, finance and possibly the technology sector. Stricter regulations may hurt the energy and banking sectors, but higher interest rates and inflation would provide some offsetting impacts. Increased immigration and less tariff threats could counterbalance the impacts of regulation on the tech industry.
Red sweep
While this is the most unlikely outcome according to the polls, it still warrants some consideration. Expect much of the same as we saw in 2017: tax cuts, deregulation and foreign policy unilateralism. We’d also likely see some volatility immediately following the election as this outcome is not priced in.
In summary, an election-related spike in volatility is likely in the near term, while more fiscal spending regardless of the outcome bodes well for markets next year. Looking beyond the election, the course of COVID-19 and monetary policy will ultimately have an impact on the markets as well. We continue to position our portfolios prudently and stand ready to take advantage of the opportunities that volatility creates.
By Alfred Lam, CFA, Senior Vice-President and Chief Investment Officer and Marchello Holditch, CFA, Vice-President and Portfolio Manager CI Multi-Asset Management
This document is intended solely for information purposes. It is not a sales prospectus, nor should it be construed as an offer or an invitation to take part in an offer. This report may contain forward-looking statements about one or more funds, future performance, strategies or prospects, and possible future fund action. These statements reflect the portfolio managers’ current beliefs and are based on information currently available to them. Forward-looking statements are not guarantees of future performance. We caution you not to place undue reliance on these statements as a number of factors could cause actual events or results to differ materially from those expressed in any forward-looking statement, including economic, political and market changes and other developments. United pools are managed by CI Investments Inc. Assante Wealth Management is a subsidiary of CI Investments Inc. Neither CI Investments Inc. nor its affiliates or their respective officers, directors, employees or advisors are responsible in any way for damages or losses of any kind whatsoever in respect of the use of this report. Commissions, trailing commissions, management fees and expenses may all be associated with investments in mutual funds and the use of the Asset Management Service. Any performance data shown assumes reinvestment of all distributions or dividends and does not take into account sales, redemption or optional charges or income taxes payable by any securityholder that would have reduced returns. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. Please read the fund prospectus and consult your advisor before investing. Assante Wealth Management and the Assante Wealth Management design are trademarks of CI Investments Inc. CI Multi-Asset Management is a division of CI Investments Inc. This report may not be reproduced, in whole or in part, in any manner whatsoever, without prior written permission of Assante Wealth Management. Copyright © 2020 Assante Wealth Management (Canada) Ltd. All rights reserved.