The Vantagepoint Market Perspective: Do the Markets Remember There’s an Upcoming Election?

06/17/2020

 

After weeks of pricing in bleak, worst-case scenarios in late February and much of March, the market now seems to see few if any clouds on the horizon. The major stock indexes are flirting with their old highs and counting on the Fed’s ability to keep interest rates at rock-bottom levels and to intervene in any areas of the financial markets that might run into trouble.

For instance, on Thursday, June 11, the stock market briefly plunged lower amid somber statements from the Federal Reserve and concerns about the prospects for a resurgence of COVID-19 cases. But traders quickly shook off those worries in the days that followed, particularly after the Fed indicated it’s stepping up its purchases of U.S. corporate bonds. As we’ve noted previously, in recent weeks, the market has been quick to look past negative news and latch onto positive headlines. 

Indeed, stock traders seem to be pricing in a V-shaped economic recovery — a quick downturn, followed by an equally quick upturn, which is what’s reflected in the chart pattern of the S&P 500 and other major stock indexes. It doesn’t seem to be factoring in the possibility of what some refer to as a square-root recovery — a quick, yet partial rebound followed by a period of lackluster economic growth.

The latest retail numbers out Tuesday do show consumer spending is off to a promising start. Sales jumped 17.7% in May, the biggest gain on record. However, it’s important to remember that the increase comes on the heels of a -14.7% drop in April amid the widespread lockdowns. Also, May’s sales numbers are still -6.1% lower than a year ago.   

Rather, it appears the Street is betting on the most optimistic prospects possible for the economy in the months and years ahead. And while we certainly welcome the market’s recent gains, it’s also worth noting that one thing the market does not seem to be factoring into its calculations is the uncertain outcome of the national election that’s just around the corner in November.  

That was not the case at the beginning of the year when periodically, the markets would swing one way or another based in part on who was ahead in the polls, particularly when it came to the question of who would be the Democratic Party’s presidential nominee.

Back then, certain segments of the market such as health-care or energy stocks might move in or out of favor depending on who among the major candidates — particularly Bernie Sanders, Elizabeth Warren, and Joe Biden — was leading the polls. That speculation largely stopped around the time of the COVID-19-inspired shutdowns, which coincided with Joe Biden functionally locking in the presidential nomination on the Democratic ticket.

Since then, the prospects for the November election haven’t been garnering headlines. Indeed, with the national election less than five months out, the market appears to be completely ignoring the impact that a change in the presidency or control of Congress could have on market valuations. Normally, we would expect the markets to show some trepidation around the election’s outcome.

With the market’s focus on COVID-19, assessing the uncertainty around the election doesn’t seem to be included in traders’ calculations. Rather, the market appears to just be pricing in a V-shaped recovery that will not only bring the economy back to its pre-COVID-19 levels, but continue to propel it higher, with no hiccups along the way.

That could change with the Democratic and Republican conventions, slated to begin in August, after which we have to assume traders will start to pay more attention to the November election and what market and economic ramifications it might have.

If the market believes there’s a realistic possibility that either the presidency or the House or Senate will change political control, it very well could result in heightened market volatility. The market currently seems to be priced for the prospects of a full and fast economic recovery that will extend into 2021 and beyond, but the prospects of altered tax, fiscal, or monetary policies resulting from various election outcomes could alter the market outlook in the coming months.   

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Please note that this content was created as of the date indicated and reflects the authors’ opinions. These opinions are subject to change, without notice, due to market conditions or other factors.

This is not intended as a solicitation nor does it constitute investment, tax, or legal advice. Reference to any fund or asset class is not a recommendation to buy, sell, or hold that fund or asset class. Neither ICMA-RC nor its subsidiaries are responsible for any investment action taken as a result of the information provided herein or the interpretation of such information. Investors should carefully consider their own investment goals, risk tolerance, and liquidity needs before making an investment decision. Investing involves risk, including possible loss of the amount invested. Past performance is no guarantee of future results.

When Funds are marketed to institutional clients by our Defined Contribution Investment Only (DCIO) team, the Funds are offered by ICMA-RC Services, LLC (RC Services), an SEC registered broker-dealer and FINRA member firm. RC Services is a wholly owned subsidiary of ICMA-RC and is an affiliate of VantageTrust Company, LLC and Vantagepoint Investment Advisers, LLC. Learn more at www.vantagepointfunds.org.

Disclosures:

This website is for institutional use only and is not intended for individual investors or the general public.

This information is intended for institutional use only and is not intended for individual investors or the general public.

Please note that this content was created as of the date indicated and reflects the authors’ opinions. These opinions are subject to change, without notice, due to market conditions or other factors.
This is not intended as a solicitation nor does it constitute investment, tax, or legal advice. Reference to any fund or asset class is not a recommendation to buy, sell, or hold that fund or asset class. Neither ICMA-RC nor its subsidiaries are responsible for any investment action taken as a result of the information provided herein or the interpretation of such information. Investors should carefully consider their own investment goals, risk tolerance, and liquidity needs before making an investment decision.

When Funds are marketed to institutional clients by our Defined Contribution Investment Only (DCIO) team, the Funds are offered by ICMA-RC Services, LLC (RC Services), an SEC registered broker-dealer and FINRA member firm. RC Services is a wholly-owned subsidiary of ICMA-RC and is an affiliate of VantageTrust Company, LLC and Vantagepoint Investment Advisers, LLC. Learn more at www.vantagepointfunds.org.