A contested election: more near-term uncertainty

Introduction
A contested election: more near-term uncertainty

As much as Canadians would like to be able to ignore US politics and focus on events within our own border, as investors that isn’t possible. Over the last year, investors have had to increasingly become macro traders to stay successful. That doesn’t seem to be changing any time soon.

Getting caught up in the details of a company while ignoring major macro trends can be very dangerous, as any investor in the energy sector can attest to. As a result, we wanted to compile our thoughts to explore what we see as ways to position to benefit from the situation in the US right now.

Looking back at the last election in 2016, investors went into election night expecting to see the election of a second President Clinton. That was the scenario all the polls and betting sites were pointing to.  Not many were expecting the actual results.

As the details started to come out and traders came to realize that Trump actually had a chance, the overnight futures contracts crashed as positions aligned to one scenario had to be reversed. However, by the time the markets opened the next morning, with the realization that indeed the Republicans had won the election, buyers had taken over and that began one of the strongest periods of positive returns the market has seen.

What suddenly caused this optimism? It certainly wasn’t the personality of the new president. It was all about his priorities.

Under the previous president, Americans had witnessed taxes and regulation increase to levels not seen before. In the first few months of President Trump’s time in office, he quickly went about tearing down regulations around banking, becoming more business-friendly and dramatically cutting both corporate and personal taxes.

So why was the market looking forward to a change this time around? To begin 2020, if you had asked an investor which outcome the market was most looking for, almost all would have said a Trump re-election. But as we all know, 2020 has become the year of the pandemic and policy responses on the part of the Trump have come under question. The focus instead became fiscal stimulus to drive markets higher in the future, which stalled during the election campaign.

Unfortunately, we’ve landed upon the worst-case scenario with the election results currently contested. How bad this situation gets may ultimately depend on just how long it takes to find out who the real winner is. We all know markets hate uncertainty and this result really means more questions without clear answers.

Some things are fairly certain, though. Fiscal stimulus is on hold until the election results are sorted out. In fact, anything requiring the signature of the president is on hold indefinitely. We may also see a hit to consumer confidence, especially if we see an increase in civil unrest. We hope that is not the case. Increased volatility is a real possibility as well.

In this situation, investors should be looking at safer and protective assets. There are a number that may benefit, but we believe the best options include cash, gold and hedging strategies with some options overlay.

Given the number of mail-in ballots and the ensuing controversy around them, it’s very likely we’ll need at least a few days to determine the outcomes in various states. Looking back at the 2000 election and the hanging chads controversy in Florida, we know that markets were more volatile during that period. It took five weeks to sort that out. We can only hope it’s a faster process this time around, but we can at least look at that history as a roadmap for expectations.

One outcome that hasn’t been discussed as much but could be the best outcome for all is if Biden wins the White House but the Republicans keep the Senate. This is a very real possibility given where the votes have fallen so far. This outcome would provide the balance of power that is traditionally something markets like because it’s a more minimal change.

Things might be messy to start if this scenario unfolds, as bills likely are held up. That’s likely bad news for stimulus plans, which may be further delayed (and would most likely lead to lower bond yields). However, it would also act as a check on sweeping change from coming in. Fears of dramatic tax hikes or a breakup of Big Tech should fade away while trade tensions should lessen, and international ties be strengthened.

It may not be the outcome either party wants, but at the end, it may be what the markets need.

Lastly, it’s important to remember that democratic elections are largely one-off events, especially as far as markets are concerned. It’s true, even if we must wait a few weeks for the results. There was a lot of noise around this election from the press, social media and the markets. However, long-term investors should remain confident, even if their own predictions and desires didn’t come true. Elections do have an impact on markets, but over time they are ultimately smoothed out and end up being one of the many events experienced along the way.

— Greg Taylor, CFA is the Chief Investment Officer of Purpose Investments


All data sourced from Bloomberg unless otherwise noted.
The content of this document is for informational purposes only, and is not being provided in the context of an offering of any securities described herein, nor is it a recommendation or solicitation to buy, hold or sell any security. The information is not investment advice, nor is it tailored to the needs or circumstances of any investor. Information contained in this document is not, and under no circumstances is it to be construed as, an offering memorandum, prospectus, advertisement or public offering of securities. No securities commission or similar regulatory authority has reviewed this document and any representation to the contrary is an offence. Information contained in this document is believed to be accurate and reliable, however, we cannot guarantee that it is complete or current at all times. The information provided is subject to change without notice.

Commissions, trailing commissions, management fees and expenses all may be associated with investment funds. Please read the prospectus before investing. If the securities are purchased or sold on a stock exchange, you may pay more or receive less than the current net asset value. Investment funds are not guaranteed, their values change frequently and past performance may not be repeated. Certain statements in this document are forward-looking. Forward-looking statements (“FLS”) are statements that are predictive in nature, depend on or refer to future events or conditions, or that include words such as “may,” “will,” “should,” “could,” “expect,” “anticipate,” intend,” “plan,” “believe,” “estimate” or other similar expressions. Statements that look forward in time or include anything other than historical information are subject to risks and uncertainties, and actual results, actions or events could differ materially from those set forth in the FLS. FLS are not guarantees of future performance and are by their nature based on numerous assumptions. Although the FLS contained in this document are based upon what Purpose Investments and the portfolio manager believe to be reasonable assumptions, Purpose Investments and the portfolio manager cannot assure that actual results will be consistent with these FLS. The reader is cautioned to consider the FLS carefully and not to place undue reliance on the FLS. Unless required by applicable law, it is not undertaken, and specifically disclaimed, that there is any intention or obligation to update or revise FLS, whether as a result of new information, future events or otherwise.

Author

Greg Taylor

Greg Taylor is the Chief Investment Officer of Purpose Investments. Greg specializes in finding and exploiting pockets of volatility in the market to drive returns.

View Comments
Next Post

The green wave: cannabis initiatives get major boost in US election

Previous Post

Markets need certainty more than a specific election winner