Markets can withstand policy changes

Regardless of the outcome, the fundamentals seem to be in place to allow investors to stay the course.
Earlier this year, investors watched the coronavirus pandemic create volatility in the financial markets, ending the longest bull market in U.S. history. The first bear market since the financial crisis lasted about a month before investors moved forward in a very big way. Now, as equities hover near record heights, many investors are wondering what Election Day will mean for their portfolios, and whether they should alter their investments accordingly.
The short answer, markets and investing experts at TIAA say, is that they should stay the course.
“Timing the market is usually a bad idea, and the election shouldn’t be another reason for people to try to time it,” says John Canally, Chief Portfolio Strategist in TIAA’s Investment Management Group. “What to sell, when to sell, how much to sell. Where to put it, how long to stay out of the market, when to buy in, what to buy, how much to buy and in which accounts. Think about it: Getting one of those right is tough; getting them all right is nearly impossible.”

Change takes time

Canally understands why investors might worry about how the election will affect their portfolios. After all, the Republican and Democratic parties do differ substantially on a wide range of issues that affect corporations and individuals. But investors often overestimate the impact of a change in the White House and Congress and conflate campaign promises with enacted legislation, Canally says.
“Campaigns are easy. Legislating is hard, with many twists and turns. There are plenty of examples in history where a winning candidate promised something and didn’t deliver it.”
In fact, even if one party controls the White House, House and Senate, they will need at least 60 votes in the Senate to enact some legislation. There are some procedures that allow for approval with a simple majority, and the Vice President breaks a tie in the Senate.

Trends and tech expected to remain the same

Canally explains that the economic, social, market and technological trends that were in place before the election will most likely continue after November 3—even if there is a political change in Washington. “New trends may start, but change comes more gradually than we think it will,” he says.

Sector trends to watch post-election

To be sure, both Canally and Brian Nick, Chief Investment Strategist at Nuveen, a TIAA company specializing in asset management, say that there might be companies, industries and sectors that could benefit—or suffer—depending on the outcome of the election. The sector driving much of the market right now, however—technology—isn’t one of them.
“Our philosophy is that tech is not going away,” Nick says. “In many ways, tech is tailor-made for the pandemic, but also for the election season, because it’s not a sector that benefits tremendously in one direction or another based on the election outcome.”
Nick calls tech a “growth behemoth that acts as almost a refuge for investors, whereas they’re nervous about everything else.” Investors know they are paying high prices for tech stocks, but tech companies also deliver earnings that are less effected by pandemic-related volatility in many cases, he explains.
Companies specializing in renewable energy may benefit if Democrats take control of the White House and the Senate. “TIAA is a pioneer in ESG (environmental, social and corporate governance),” Nick notes. He expects investors in ESG-focused strategies to do a bit better in this scenario.
And utilities might benefit, in an indirect, relative way, if taxes increase (a scenario tied to potential Democratic leadership), since utilities are not particularly exposed to taxes, Nick says.

Other drivers: the Fed and trade policy

In Washington, of course, fiscal policy coexists with monetary policy, and the election’s results are unlikely to alter monetary policy, Nick says. The Federal Reserve Board, which is responsible for interest rates, operates independently of politics. Right now, monetary policy is accommodative, supporting the stock market, and Nick sees key interest rates staying below 2% for at least a few more years.
“The Fed has now handcuffed itself to zero interest rates for several years out. It’s going to make it just that much harder for them to justify raising rates, because now it’s saying inflation needs to get almost uncomfortably high before it acts.”
Trade policy has caused volatility in the markets before as tariffs were discussed and enacted not only with China but with European and North American countries as well. That might calm down with the Democrats in the White House, Nick says.
“Trade policy (during a Democratic presidency) might not necessarily be oriented toward cutting one free-trade deal after another, but I think it would at least be more orderly and predictable and well communicated, and would probably be multilateral in nature,” Nick explains.
“I don’t think there’d be as much constant white noise in the background. The market was fine in 2019, but there was a lot of volatility around trade policy. I think that probably goes away under a Biden administration, even if he decides to keep the tariffs in place.”

Supportive monetary policy has helped the stock market

The Federal Reserve has kept the Federal Funds rate low since the 2008 recession.
Source: Trading Economics and Yahoo! Finance

Capital gains impact

Nick says that if the Democrats add both the White House and Senate to their current hold on the House of Representatives, an increase in capital gains taxes and income taxes is probable, both for higher-earning individuals and corporations. But he offers a caveat: To some degree, tax hikes may depend on how palatable they are to the Democratic Party’s most conservative senators, meaning any tax increases may end up being negotiated down from initial estimates.
In the meantime, he says, there’s a possible flip side to potential higher taxes that may be going overlooked: higher government spending. Companies in the infrastructure space, for example, could benefit, he says.
“We’re not going to see tighter fiscal policy under unified Democratic control,” Nick says. “Yes, higher capital gains taxes, in a vacuum, are not a positive for stocks, but if there’s a tremendous amount of infrastructure investment going on, if there’s a huge increase in unemployment benefits, that is going to be supportive. You can’t look at any of this in a vacuum.”

Investors should stay the course

In the end, Canally notes, it’s the long term that counts, and through that prism, markets are ultimately driven not by change in Washington but by corporate profit growth and the economy. “The U.S. economy is a large, diverse global economy, and the things driving the economy today were set in place long ago,” he says.
So, what should investors do? It’s smart to be mindful of the election result and remain in contact with their financial advisors to make sure they are well positioned to hit their long-term goals, Canally says.
“Having a disciplined, repeatable and unemotional process to manage risk, do asset allocation, assess outside managers, take income, rebalance and manage taxes is far more important than the election outcome for most investors,” he says.

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The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
This material is for informational or educational purposes only and does not constitute fiduciary investment advice under ERISA, a securities recommendation under all securities laws, or an insurance product recommendation under state insurance laws or regulations. This material does not take into account any specific objectives or circumstances of any particular investor, or suggest any specific course of action. Investment decisions should be made based on the investor’s own objectives and circumstances.