Podcast: Episode 10
09.25.20

Countdown to Election Day

What can you expect in the weeks ahead? Brian Nick, Chief Investment Strategist of Nuveen, a TIAA company, shares his perspective on the upcoming general election, markets and economy.

Podcast: The 2020 Presidential election: With uncertainty comes opportunity

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TIAA Perspectives Podcast Episode 10: The 2020 Presidential election: With uncertainty comes opportunity Hosted by Jim Daniello, CFP®, Wealth Management Director for TIAA. Joined by Brian Nick, Chief Investment Strategist at Nuveen. - [Jim] Hi, everyone, I'm Jim Daniello, a wealth management director for TIAA. Thank you for joining me for another installment of TIAA's "Perspectives Podcast," where we'll talk about financial planning strategies, money management tips, and steps you can take now to remain on track towards your goals. Today, we're talking about the upcoming US presidential election in November. Joining me to share his insights is Brian Nick, Chief Investment Strategist at Nuveen. Brian holds the chartered alternative investment analyst designation and has more than a decade of experience analyzing economic, equity and fixed income data and developing investment strategies to help optimize client portfolios. He's a member of Nuveen's Global Investment Committee and a voting member of TIAA's Asset Allocation Committee. Great to have you with us, Brian. - [Brian] Thanks, Jim, it's always good to be here. - [Jim] Brian, with the 2020 US general election less than two months away and Labor Day behind us, now is the traditional time that investors begin paying close attention to the state of the race and possible policy changes. And while each election season is unique, this election year is truly unprecedented. Before you share your thoughts on the upcoming election, can you provide our listeners with some background on how Nuveen compiles election perspectives and why it's important to share these insights with investors? - [Brian] Sure, Jim. I'm a member of Nuveen's Global Investment Committee, which is a group of the firm's investment leaders that works to identify investment trends and provide insights on whatever it might be driving market activity. So examining the upcoming election and looking at it in a historical context is just part of our effort to refine our own views about the markets and provide our clients with our best thinking. We know this is a topic that our clients are interested in, so we've been revisiting some of the lessons we learned in 2016 to present policy scenarios and market impacts for the most likely outcomes later this year and into 2021. This includes advice to investors about what we believe are the best opportunities across asset classes now that we're in election season. - [Jim] Brian, on numerous occasions this year, you've mentioned that the global pandemic has been the dominant driver of the economy and financial markets, and will figure prominently in the elections outcome. As we move closer to November 3rd, do you believe the elections will become the primary driver of the markets? - In a word, no. Like all elections, the November contests have grabbed investor's attention. There's considerable evidence that folks have been paying attention to this one for much longer than normal, but we don't expect the results, important though they certainly are, to be a primary driver of financial markets. Other things like the progress on the coronavirus vaccine and the economic situation over the balance of the year will fill that role. But that doesn't mean the election will be inconsequential for markets. Depending on the outcome, tax, spending and regulatory policies could obviously look very different, which would likely drive some differences between relative asset prices. For example, should the blue wave come to pass giving Democrats full control of the law making process, some taxes could rise, but spending would likely rise by far more. We'd see some compelling investment opportunities in that scenario. Regardless of the outcome, the US economy will require more federal assistance in 2021. We also think a bipartisan trend toward onshoring certain manufacturing and a growing anti-trade movement will endure in light of the pandemic, but a key lesson from 2016, avoid making high conviction bets that rely on one particular political outcome to perform well. - [Jim] Brian, can you expand on lessons learned from 2016 and how that information factors into your outlook for the 2020 election? - [Brian] We can all probably recall where we were on election night in 2016 when it became clear that Donald Trump, the underdog to win based on opinion polls and betting markets would become the 45th president of the United States. I was up late furiously rewriting my post-election recap for our old TIAA blog, which in my arrogance, I had pre-written for a certain outcome that did not come to pass. And I wasn't alone. Because the results were unexpected, the market reaction was swift and clear. Interest rates and the US dollar rose while financials and industrials rallied on expectations of more infrastructure spending, which never happened, lower taxes, which did happen and less regulation, which we've seen some of as well. But investors shouldn't assume that the market reaction the day after Election Day this year will be nearly as large, for two key reasons. First, the outcome could already be priced in prior to the election. 2016 was a big surprise and those don't happen every four years. It's harder to see an election result when it's priced in gradually over a period of weeks or months, than when it hits the markets on a single day. And that's one important way in which the 2020 presidential race looks different so far than the 2016 contest. Former Vice President Biden's lead over president Trump has been steadier and on average larger than Hillary Clinton's was four years ago. And by the way, while national polls certainly don't tell us the whole story, the national polls in 2016 came pretty darn close to the ultimate outcome. So we shouldn't assume they're way off this year. - [Jim] Brian, do you anticipate a tightening of the polls? Also, we keep hearing about a possible October surprise. Is that still on the table? - [Brian] That's a good question, Jim. The race could certainly tighten and you're right, we have to watch out for a possible October surprise, which could come in the form of a debate GAF or a breakthrough on a vaccine. But if Biden's lead doesn't do, our financial markets are likely to gradually begin to reflect a return to Obama era regulatory policies and tax rates. This might put downward pressure on equity multiples and cause credit spreads to widen modestly in advance of Election Day. - [Jim] Brian, you mentioned there were two reasons why investors should not expect a large market reaction immediately following the election. What was the second reason? - [Brian] The second point is that few, if any, major policy reforms are likely to be enacted until well into 2021, and that includes tax increases. Regardless of the makeup of Washington next year, addressing the pandemic and the resulting economic distress will certainly still be job number one. Should Former Vice President Biden emerge victorious with a democratic majority in both the House and Senate, and that's currently a better than 50-50 chance, according to the betting markets I predicted, the precise legislative agenda will depend on the margin in the Senate and the state of the economy. Should the US still be in the throws of business and school closures due to the coronavirus, sweeping changes to healthcare and environmental policies would take a back seat to emergency stimulus and support. Tax hikes may not materialize at all. - [Jim] You bring up a really good point about the timing of any major policy changes. It's really important to stress that policy changes like legislative changes take time to formulate and policy proposals, especially during an election year, are not set in stone, they're subject to change over time for various reasons. So it's generally not prudent to tie your investment decisions to either party's election policy agenda right now, correct? - [Brian] Right, the bottom line is that election outcomes and political alignments are rarely significant or durable drivers of key market bellwethers, like the S and P 500 index or the 10-year US treasury yield. Investors' returns over the long-term are driven by market valuations and individual asset allocation decisions, not the political party controlling Congress or the White House. Even if we knew the outcome of the election in advance, that does not necessarily tell us much about the nature and extent of resulting policy changes. - [Jim] I agree, and I think it's important to emphasize for our listeners that it's generally not a good idea to make significant changes to your long-term investment plan or investment policy statement based on possible scenarios. - [Brian] That's right, Jim. That being said, we do think the potential for policy changes next year could influence relative performance within and across sectors. It's worth looking at what might happen in the event of what seemed to be the two most likely outcomes, a Democratic sweep or a continuation of the status quo. - [Jim] Let's start with what a Democratic sweep might look like should Former Vice President Biden win the presidency and the Senate flips to Democratic control. - [Brian] In that scenario, Jim, we would expect at least a moderate rise in corporate and certain individual income taxes and a larger rise in federal spending to fund more fiscal stimulus, as well as healthcare and environmental policy reforms. The direction of monetary policy would remain unchanged with Federal Reserve Chair, Jerome Powell, likely to receive another four-year term or be succeeded by someone with an even more dovish policy orientation. Trade and foreign policy would also probably become less frequent major market drivers, with Biden placing a greater emphasis on diplomacy and multilateral action, even as skepticism about globalization grows increasingly bipartisan. - [Jim] So, Brian, what are your expectations for the markets under this scenario? - [Brian] So within equities and credit, we see potential winners in renewable energy and electric automobiles. Firms with large international exposure could also benefit, given our expectation that the trade risks will deescalate. In fixed income, significant new deficit spending, would sustain the reflation trade leading to a weaker US dollar and TIPS out performance. Municipals could also be helped in two ways under a unified Democratic control. More federal assistance to state and local governments could help stress budgets and higher tax rates could increase demand from higher earning investors for tax-exempt securities. We see potential gains for real assets tied to natural resources like forests, as well as infrastructure investments tied to sustainability and climate change. With more onshoring of manufacturing also expected, industrial real estate could perform well as well. - [Jim] So how does your outlook differ under a status quo scenario where President Trump is reelected? And do you anticipate the GOP will hold the Senate majority under this scenario? - [Brian] Yes, if President Trump is reelected, we would expect the Senate to also remain in Republican control even as the Democrats seem very likely to retain the House. Importantly, this scenario is not currently priced into the market, so should it happen, it could trigger volatility similar to what happened post 2016 when high tax companies and those with greater regulatory risk enjoyed better performance. Fiscal policy would not be quite as loose as the first scenario given growing concerns among Senate Republicans about deficits, but a bipartisan stimulus plan around infrastructure would be on the table. Trade policy could become even less predictable and more adversarial, especially with respect to China. More and higher tariffs seemed likely in a second Trump term. - [Jim] So how would this scenario play out in the financial markets? - [Brian] Starting again with equities and credit, cyclical sectors and smaller cap companies with a high percentage of revenue generated domestically would be likely winners as would firms with high tax burdens or high regulatory risk. On a relative basis, lower tax rates and a federal government less inclined to provide direct support to States could create issues for municipal bonds, but, overall, solid fundamentals and strong supply demand dynamics should still support their prices. The US dollar may pause its recent weakening trend and remain strong if concerns turned back to trade policy uncertainty and we see a continued broad fall in global trade flows. Low taxes and interest rates would be a positive for commercial real estate. We'd specifically look for opportunities in industrial real estate, as long as it was more leveraged to E-commerce and less leveraged to trade. - [Jim] Brian, one possibility we haven't mentioned yet, but that seems to be getting some attention is the likelihood that we won't know until days or perhaps weeks after the election what the outcome actually is. How would markets react to a prolonged period of uncertainty like that? - [Brian] It's definitely not a particularly fun possibility to entertain. We don't have much in the way of recent experience to compare it to, save perhaps the more than four year Brexit process that remains ongoing between the UK and Europe. Let's hope it doesn't take that long. Back in 2000, the Florida recount obviously delayed the election result until well into December and equity markets didn't do especially well during that interim period, but that was also happening as the country was slipping into recession, so I don't think there's much we can learn from it. If we all wake up on November 4th or November 10th or December 5th, and don't know the name of the next president or who will control the Senate, it really just prolongs the election-related uncertainty that typically only shows up before elections, not after. I don't think it would be a huge market-moving event because as we've been saying, the same concept with respect to not knowing the policy outcome in advance would apply, just for a little longer, I can easily see investors pulling back from risk assets in the event of a contested election result, but I don't see it as damaging market performance for more than a brief period. We will know who will be running the show by January, 2021 and probably a lot sooner than that. And once we know, investors will have a chance to react. - [Jim] I'm glad you brought up investor reactions. We've been talking primarily about how the markets may react to different scenarios and circumstances, but given these different scenarios, what should individual investors be thinking about in the weeks ahead as the race heats up and the country heads to the polls? - [Brian] As we've been indicating, the political environment can and most likely will affect global financial markets, but economic fundamentals and valuations have remained more important. Regardless of the political backdrop, we expect many trends that have been enforced for some time to continue, including the rise in importance of environmental, social, and regulatory factors in driving investment performance, the growing role of alternatives for investors of all stripes and the ongoing challenge of income generation in a low yield environment. At Nuveen, we're going to continue focusing on these issues and how they affect our own investment approaches and our clients' portfolios. - [Jim] Thank you, Brian. As usual, this information is extremely helpful for our listeners as they seek ways to protect their portfolios and optimize their planning during these challenging times. - [Brian] My pleasure, Jim. - [Jim] As we wrap up, I want to remind our listeners that as Brian pointed out, it's really important that your investment decisions are driven by your long-term goals, not short-term changes that may take place in the markets, the economy, or the political climate. By anchoring yourself in a plan, you ensure that each decision you make is aligned with your personal goals, timeline, and risk tolerance. That helps to head off reactive or emotional decision making that can easily derail your strategy. If you don't have a plan, consider scheduling time to meet with a TIAA advisor to put one in place. If you already have a plan, make sure you're communicating with your advisor frequently and reviewing your plan on a regular basis, especially during times of uncertainty. Thank you for listening in and for spending a few minutes of your time with us today. Have a great day, everyone. [END] Jim Daniello is a Registered Representative of TIAA-CREF Individual & Institutional Services, LLC. This material is prepared by and represents the views of Brian Nick, and does not necessarily represent the views of Nuveen, its affiliates, or other Nuveen staff. These views are presented for informational purposes only and may change in response to changing economic and market conditions. This material is not intended to be a recommendation or investment advice, does not constitute a solicitation to buy or sell securities, and is not provided in a fiduciary capacity. The information provided does not take into account the specific objectives or circumstances of any particular investor, or suggest any specific course of action. Investment decisions should be made based on an investor's objectives and circumstances and in consultation with his or her advisors. Certain products and services may not be available to all entities or persons. Past performance is not indicative of future results. Economic and market forecasts are subject to uncertainty and may change based on varying market conditions, political and economic developments. Advisory services are provided by Advice & Planning Services, a division of TIAA-CREF Individual & Institutional Services, LLC, a registered investment adviser. 1333796

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