A pragmatic, pre-election view of the market
Anthony Saglimbene, Ameriprise Global Market Strategist– Ameriprise Investment Research Group
As of 10/15/2020
- Trends in COVID-19 infection rates, consumer/business activities and fiscal stimulus are critical drivers of the economy and markets near term.
- Longer term, stock prices tend to react more favorably in periods of divided government.
- With support from your Ameriprise financial advisor, follow a disciplined investment approach as you face election-related market volatility that may arise.
Stock prices continue to accelerate higher, despite a global pandemic exerting unprecedented health and economic challenges. In early October, the S&P 500 Index and NASDAQ Composite were less than 5% away from their all-time highs. Current stock tailwinds include:
- Massive monetary and fiscal stimulus
- Expectations that record-low interest rates will remain low for an extended period
- Positive developments in COVID-19 vaccines and treatments
- Improving U.S. economic activity
- A strong housing market
- An unemployment rate that has fallen for five consecutive months
- Expectations that corporate profit trends will continue to improve
Moving forward, we believe investors will focus on election outcomes, vaccine prospects, stimulus efforts, economic momentum and the 2021 business outlook. All carry "wildcard" elements that could add volatility to markets through this year and beyond — regardless of the makeup in Washington.
While election results undoubtedly could tilt market dynamics longer term, we do not believe they are likely to change near-term drivers materially. Historically, stocks tend to rise in any given year, with little evidence that political leadership directly influences results. A divided government tends to produce the best market results over time.
Notably, the makeup of Congress could heavily influence the path for fiscal policy. If one party gains control of the White House and Congress, its majority control would likely be slim, in our view.
In a divided government or one with a small majority, moderate policies from each side could more heavily influence legislation over the next two years. More consensus-building may emerge to pass legislation. However, if political polarization increases, significant policy changes with meaningful impacts to investors would be unlikely, in our view.
Market performance is driven by a host of variables, and mainly by drivers independent of government policy changes. But in some instances, and during specific political environments, we believe fiscal policies can influence market performance more directly. For example, the Tax Cuts and Jobs Act of 2017 boosted corporate earnings and stock prices.
We expect a generally positive business cycle over the next several years, while interest rates are likely to remain at very low levels. This is independent of the political majority after Nov. 3. Also, tailwinds from coordinated monetary, fiscal and business activity could converge to drive corporate earnings higher through next year. This could generate additional U.S. economic growth.
Of course, stock prices seldom move upward in a straight line. We expect the market and economy to experience bouts of volatility. But whichever party controls the White House and/or Congress next year, they will assume leadership with a rare advantage — a coordinated monetary and fiscal effort and an economy with an opportunity to accelerate higher from what are still depressed levels versus historical averages.
From a stock sector perspective, the composition of Washington after the election could change priorities across federal fiscal spending, taxation, tariffs and regulations. We believe Financials, Energy, Industrials, Materials and Health Care sectors could experience a range of potentially positive and negative impacts — albeit marginal ones — based on election results. That said, growth in economic activity and specific sector dynamics could more significantly influence stock prices over the next 12 - 24 months.
The final weeks of a presidential election cycle usually increase investor anxiety and market volatility. This year, market volatility could extend past Nov. 3 and keep investors and markets on edge for a period of time. However, investors should remain confident their diversified portfolios can help them weather potential political storms and keep them on track with their financial goals.
Investing based on the shifting winds in Washington is difficult at best. After the dust settles and the makeup of Washington is known, investors should work with their financial advisor. Together, they can decide if modest tactical portfolio adjustments are appropriate. We believe investors' best defense against election unknowns is to:
- Maintain a pragmatic view of the political environment.
- Follow a well-diversified investment strategy based on your risk tolerance.
- Stay focused on your long-term financial goals.
S&P sector returns YTD
Data source for indices and sector graphs: Morningstar Direct, as of October 9, 2020
Past performance does not guarantee future results.