The Vantagepoint Market Perspective: Without a Concession, Uncertainties Will Linger

11/06/2020

 

The market’s immediate reaction in the first two days following the election on November 3 was exceedingly positive, with traders pushing the S&P 500 to within shooting distance of its all-time high. We believe the market’s initial reaction rests on the history of positive market performance during periods featuring a divided government. This quick post-election view is that Washington is unlikely to come to an agreement on any substantial policy changes, particularly as it relates to corporate taxes, which markets indicate would be supportive of current valuations.  

But, much like the rest of the year 2020, a number of uncertainties are still looming on the horizon.

Presidential Election

As we noted in last week’s piece, heading into the November 3 vote, traders hadn’t really factored in an undetermined election that could drag on for days — or even weeks or months. At this point, less than 72 hours after the polls closed, it seems unlikely that either presidential candidate will concede the election any time soon — particularly with the incumbent declaring victory and alleging fraud on Twitter and in a White House briefing, all while his opponent was launching a presidential transition web site.

In light of the ongoing disputes, we should anticipate litigation and potential challenges even if the media or the elections boards in various states declare a winner. What’s more, states with a tight margin between the number of votes cast for either of the two candidates might go into automatic recounts, which could delay any court challenges that may later occur. 

Georgia On My Mind

While the presidential contest has been dominating the news cycle, a couple of key races in Georgia could be what actually determines the balance of power in the Senate. Georgia Senate elections require the victor to win at least 50% of the vote. And if that doesn’t happen, a runoff election between the top two contenders occurs.

As of this writing, the state already has one race  — between Republican Senator Kelly Loeffler and Democrat challenger Raphael Warnock, that is destined for a runoff January 5, 2021. And another race, between Republican Senator David Perdue and challenger Democrat Jon Ossoff, is likely heading in the same direction. In either case, a runoff race is likely to garner tens of millions of campaign dollars from both parties in an effort to influence which party wins.

The stakes are big. If the Democrats take both seats, it would likely result in a 50-50 tie in the Senate, with the vice president of whichever party captures the presidential election tipping control of the Senate to the presidential party. In the event that Joe Biden is sworn in as president, the first act of a new Vice President Kamala Harris would produce a unified Democratic government, a scenario that markets completely discounted in the immediate aftermath of election day. While we cannot forecast the probability of such an outcome, we believe the markets would experience substantial volatility as expectations rapidly adjusted if control of the Senate shifted to the Democrats.

Stimulus or No Stimulus?

It’s important to note that the real economy has not changed in the days following the election. Put differently, there’s not been a substantial shift in the fundamentals that would justify a market rally other than to project what market participants see as the likely outcome of the election. 

These days, the market only seems to be able to focus on one issue at a time. In the weeks and months, leading up to the election, the size and probability of a stimulus package was foremost in traders’ minds. And after the votes were cast on November 3, the market’s immediate response was to price in a Democratic president and a Republican-majority Senate, rather than to factor in the prospects of drawn-out election outcome.

The current situation and the likelihood not only a lack of a concession by either candidate in the presidential race, but also of recounts and litigation, make it less probable that both political parties will be able to agree on a stimulus package because Washington is likely instead to spend the coming days and perhaps weeks fixated on politics and who controls the balance of power.

And the longer the fight around the election goes on, the higher the risk that a stimulus package is delayed. Separately, it also may coincide with the December 11 deadline to reach a compromise on funding for the federal government itself. How the election plays out could have a material impact on both decisions, including on the timing and size of any potential stimulus and whether that decision intersects with the federal government’s funding deadline. If acrimonious relations between the political parties intensify, the risk rises that the government shuts down just as the nation heads into the holiday season.  

At this point we’re not handicapping the likelihood of whether this will happen, but we do note that December 11, 2020 is not that far away. And we do not believe that either Congress or the White House is fully equipped to separate the political fallout of the election from their legislative responsibilities.

The 2024 Presidential Election: Too Soon?

Yet another wildcard at play is the voting behavior of those in the Senate who may be eyeing a 2024 run for the presidency. Whichever candidate is declared the winner in the 2020 presidential election, there are enough potential Republican candidates for the 2024 White House race to change the dynamics of how the Senate is likely to view legislation such as a stimulus package, particularly when it comes to its size or likelihood of passage.

If President Trump remains in office and certainly if Joe Biden wins the presidency, Republican Senators who are sizing up their own prospects for a 2024 presidential run may shift to becoming deficit hawks and focus their efforts on cutting the size of any stimulus package and limiting any other spending in potential legislation. 

COVID-19: Still a Risk

Which brings us back to COVID-19, a fixation for the market in the spring and something it seems many market participants have now been downplaying for some time. The U.S. recently passed a grim milestone of 100,000 new cases a day according to data from Johns Hopkins. For many, it may have been easy to miss this headline because of all the rightful focus on the significant implications of the election and its aftermath. But it serves as a vivid reminder that all of the issues relative to COVID-19 have not gone away and, in fact, may be intensifying as we head into winter.

If infections continue to run at this level, we are concerned that the U.S. health-care infrastructure will be further stressed and could exceed capacity in some regions. It also increases the risk of the imposition of additional restrictions within the U.S., including widespread regional shutdowns, which are damaging to the economy — particularly small businesses. Indeed, some areas are already enacting curfews and other restrictions in an effort to curb the virus’ spread.

One positive is that the treatments for those suffering from the virus are more effective today than they were when the virus initially reached our shores earlier this year. Of course, if medical professionals are overwhelmed and hospitals stressed beyond capacity, treatment options can become scarce. We continue to believe that an effective response to the virus is multi-tiered and includes increased widespread accurate testing, the continued use of masks, social distancing, better treatment and therapeutics, and the development and distribution of a successful vaccine.   

Investing in this Environment

The news cycle and the number of issues in contention on both the political and economic fronts may seem overwhelming. As we mentioned earlier, the markets themselves seem to be somewhat myopic and only focused on one topic at a time. If they view the headline of the day as a positive for the economy, they push stocks higher and if they interpret it as a negative, they send them lower — after all, volatility can work in both directions.

At all times and certainly in times like this, it is imperative to focus on the purpose of investible assets and the time horizon for investing. For those saving for a retirement that is years (or decades) in the future, it’s important to take a long-term perspective and not try to jump in and out of the stock market based on headlines. Instead, remember that portfolio managers spend every day monitoring markets and adjusting allocations in the funds they oversee, which should hopefully allow individuals to focus on their long-term objectives and rely upon others to navigate short-term market swings.

As tumultuous as 2020 has been, the year is not over yet. Defined-contribution investors should aim to keep their focus squarely on their own objectives and investing timelines, even as the short-term headlines continue to loom large.  

Disclosures:

This information is intended for institutional use only and is not intended for individual investors or the general public. This article includes links to external websites. While we believe this information to be reliable, we cannot guarantee its complete accuracy.

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 Investment Only (IO) 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 MissionSquare Retirement 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 Investment Only (IO) team, the Funds are offered by MissionSquare Retirement Services,, an SEC registered broker-dealer and FINRA member firm. MissionSquare Retirement Services is a wholly-owned subsidiary of MissionSquare Retirement and is an affiliate of VantageTrust Company, LLC and MissionSquare Investments. Learn more at www.vantagepointfunds.org.