Daily Capital

Weekly Market Digest: What to Anticipate Despite Uncertain Election Outcome

An apparent, but still disputed, election victory for former Vice President Joe Biden coupled with a divided Congress was well received by equity markets. Global stocks posted their biggest gains since April. Bonds also gained and the dollar fell. Amid the focus on the election, COVID-19 cases continued to soar around the world. U.S. jobs growth exceeded expectations with the unemployment rate falling to 6.9%.

Weekly Returns

S&P 500: 3,509 (+7.3%)

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FTSE All-World ex-US (VEU): (+7.5%)     

US 10 Year Treasury Yield: 0.76% (-0.12%)

Gold: $1,952 (+4.0%)    

EUR/USD: $1.188 (+2.4%)

Major Events

  • Tuesday – U.S. national elections were conducted relatively smoothly, but without a conclusive winner for president.
  • Wednesday – California Prop 22 passed, exempting gig economy companies from classifying workers as employees, in a win Uber and Lyft and others.
  • Thursday – President Donald Trump suggested fraud and miscounting in the election.
  • Thursday – The U.S. added more jobs than expected in October. Unemployment dropped to 6.9%.
  • Friday – The U.S. announced 119,000 new COVID-19 cases, marking a new daily high.

Our Take

As largely anticipated, election night passed without full clarity of who will be the next president. While Biden appears ready to claim victory, President Trump is challenging results in multiple states and there may not be a final result for days or weeks. Notably, while a contested result was considered by many as the feared outcome, market reaction has been positive. If there is drama in the likely court cases to come, we should expect elevated daily volatility for the near future.

We view the direction of the election as bullish for stocks. The biggest risk of a Biden win for stock prices is higher corporate tax rates. Divided government makes that significantly less likely. The absence of an anticipated blue wave may mean less stimulus than some were expecting, but we believe we will see a significant package passed by the end of the year either way, especially if COVID-19 continues to accelerate.

Historically, the S&P 500 has mixed results on election week but is higher on average when looking six months out, regardless of which party wins. The first year of a president’s term is up 7.7% on average. This is more modest than other years in the cycle, but still costly to miss when compounding results.

In any election, there will be winners and losers. A common mistake is assuming the early market reaction will cement into a longer-term trend. As an example, when President Trump was elected in 2016, small cap stocks outperformed the S&P 500 by about 10% in the first month, only to trail significantly since then.

Ultimately for capital markets, politics is only one factor. COVID-19 is spreading rapidly, and Europe is reinstating shutdowns. The U.S. probably will not be far behind. Economic shutdowns have a horrible cost on jobs and the economy, though as the virus has become better understood, their impact on capital markets has moderated. With valuations across the market very different from the beginning of the year, winners and losers from renewed shutdowns may look different from the first round.

2020 has highlighted the benefits of having a long-term investment strategy in place. Between the pandemic, dizzying valuations in some stocks, and an emotional election cycle, there have been plenty of pitfalls for market timers. Those with a diversified, global approach have participated in gains for the year and carry much less risk of veering off track. Given fiscal policy and euphoric sentiment for growth stocks, carrying either excessive cash allocations or concentrated exposures feel like bigger risks to long-term goals than normal right now.

The content contained in this blog post is intended for general informational purposes only and is not meant to constitute legal, tax, accounting or investment advice. You should consult a qualified legal or tax professional regarding your specific situation. Keep in mind that investing involves risk. The value of your investment will fluctuate over time and you may gain or lose money.

Any reference to the advisory services refers to Personal Capital Advisors Corporation, a subsidiary of Personal Capital. Personal Capital Advisors Corporation is an investment adviser registered with the Securities and Exchange Commission (SEC). Registration does not imply a certain level of skill or training nor does it imply endorsement by the SEC.

Craig Birk leads the Personal Capital Advisors Investment Committee and serves as Chief Investment Officer. His focus is translating improvements in technology into better financial lives. Craig has been widely quoted in the Wall Street Journal, Bloomberg, CNN Money, the Washington Post and elsewhere. Prior to Personal Capital Advisors, he was a leader within the portfolio management team at Fisher Investments, helping assets under management grow from $1.5 billion to over $40 billion. Craig graduated from the University of California at San Diego and has earned the Certified Financial Planner® designation.

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