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Smart Money

October 30, 2020

A Guide to the US Election

Smart Money

In 2016, the citizens of the US stunned the world when they elected Republican candidate, Donald Trump, into the White House. Almost four years later, President Trump is again trailing in the polls as election day approaches. The race is sufficiently tight, and the incumbent’s unpredictable conduct is signaling that the outcome will not be known until well after the 03-Nov-20 election...

In 2016, the citizens of the US stunned the world when they elected Republican candidate, Donald Trump, into the White House. Almost four years later, President Trump is again trailing in the polls as election day approaches. The race is sufficiently tight, and the incumbent’s unpredictable conduct is signaling that the outcome will not be known until well after the 03-Nov-20 election date. Nevertheless, looking past the disruption, we know each party’s policies will impact players differently. The content below discusses several issues that are top of mind for NHLers.

The US Election Primer

October 28, 2020

Unpredictable Election Is Problematic For Investors

Market Recap & Boxscore

Volatility accelerated in October as the US approaches one of the most charged elections in history. Global stock markets started strong in October, conceivably because a Democratic sweep would provide much needed stimulus to the US economy. However, the S&P500 dropped 7.5% from 12-Oct-20 to 28-Oct-20 as Covid-19 fears resurfaced and stimulus doubts emerged. While confirming the i...

Volatility accelerated in October as the US approaches one of the most charged elections in history. Global stock markets started strong in October, conceivably because a Democratic sweep would provide much needed stimulus to the US economy. However, the S&P500 dropped 7.5% from 12-Oct-20 to 28-Oct-20 as Covid-19 fears resurfaced and stimulus doubts emerged. While confirming the intentions of all market participants is impossible, with the Volatility Index (VIX) touching 40, anxiety and apprehension is prominent as the 03-Nov-20 election nears.

Forecasts for a slower than anticipated rebound in demand for Oil caused WTI prices to drop 6.7%. Surging COVID-19 cases and flush oil inventories provided the setting for the weak outlook. Interestingly, bonds did not provide the protection on which investors have come to rely, with the 10-year yield rising 11bps on the month. Nevertheless, the Fed remains active as officials have emphasized that they will continue to buy Treasuries to control the yield curve. Gold was largely flat during the period, despite the bump in yields, but it slipped as the pullback in stocks deepened.

Third-quarter earnings season is underway, and the market’s reaction has been surprising. Stalwarts, like Microsoft and Mastercard, were both slammed despite strong results, while many other companies we cover finished in the red following beats and increased guidance. Investors were unhappy with the absence of guidance from Apple, whose shares now trade about 20% below its 52-week high ($137.98).

With noise around the election driving volatility, it is important to highlight the significant contests on the 03-Nov-20 ballots. There are three key battles to monitor, the first being the Presidency. Next is the vote for who controls the House of Representatives (the House), while the third is for the Senate. The President and the entire House are up for election, but less publicized is the battle for the Senate. Thirty-five of the one-hundred Senate seats are available. The Republicans need to hold 23 to retain their slim 53-47 majority. This is important as the Senate is responsible for approving motions passed by the House and any single member can have a key impact on the decisions of the US government. The odds of a Democratic Senate were surging into September. However, recent polls and betting markets are forecasting more of an even race which translates to more uncertainty for the markets and less confidence in future fiscal support. A similar pattern has surfaced around the Presidential race, which helps explain the subsiding conviction in a Democratic sweep. The only race that seems to have any sense of clarity is for the House, where the end result is reflects the popular vote rather than the electoral college (President) or the decision of a minority of specific seats (Senate).

The Democratic party are favoured for those who desire a prompt and sizable fiscal stimulus bill. House Democrats proposed a $2.2 trillion package whereas the Trump administration most recently offered a $1.9 trillion tender. As such, a Democratic President/Senate combo would ensure a quick and hefty deployment.  The additional stimulus would directly aid the economy. We witnessed the impact the first round of relief had on US consumer spending and in the stock market as newly minted Robinhood investors spent their cheques. On the other side, Democratic leadership is associated with higher taxes at both the corporate and personal level. A Republican sweep casts doubt on the size of the package but comes with it a status quo and possibly more favourable tax implication. Either way, the ability to predict the outcome is hard enough, as evidenced by the swings in polling. Accordingly, accurately forecasting the market’s reaction to a temperamental result adds another layer of complexity. Consequently, we are focused on designing a diversified portfolio with ample liquidity. Our objective is to minimize negative impacts by remaining nimble and buying opportunistically.

October 01, 2020

Election Outlook Obscures The Prospects for 4Q20

Third Quarter 2020 Newsletter

Bond Yields Firm As Domestic Equities Rally – Global equities gained in the third quarter but performance was uneven among geographic regions. Aggressive monetary and fiscal stimulus measures helped asset prices in the United States while lockdowns in Asia neutralized COVID-19 and fueled markets. As fiscal stimulus measures ran their course and children returned to school in September...

Bond Yields Firm As Domestic Equities Rally – Global equities gained in the third quarter but performance was uneven among geographic regions. Aggressive monetary and fiscal stimulus measures helped asset prices in the United States while lockdowns in Asia neutralized COVID-19 and fueled markets.

As fiscal stimulus measures ran their course and children returned to school in September risk appetites slipped. U.S. markets fell 4%-6% during the month but are equivalently within all-time highs. European equities were flat-to-down as exposure to underperforming financial and energy sectors prevented gains. Despite heavy weights to similar sectors, the Canadian S&P/TSX Composite advanced nearly 5% as metals, mining and other commodity related equities surged.

Most commodities received a bid as the U.S. dollar fell against major currencies (excluding the Yen). Lumber attracted most of the limelight as it broke through previous highs, topping out at $1,000 before finishing the quarter at $612, gaining 41%. Oil prices were the first commodity to falter, ending the quarter flat after peaking at the end of August.
Gold drifted higher but came under pressure as bond yields began to firm and the U.S. dollar found a temporary bottom. Higher bond yields without inflation will limit gold’s upside and likely upset equity valuations.


The Implications of Elections – Conventional wisdom says that uncertainty is bad for markets. Intuitively this makes sense since confidence in an outcome, or at the very least a stable outlook, should lead to more investment decisions today. With the U.S. election (03-Nov-20) just around the corner equity markets have started pricing in the risk of political instability. This is most evident in the VIX (Volatility) Index, which has anticipated a period of uncertainty in the fourth quarter since the market decline in March. This marked a turning point for expectations about the election’s outcome. President Trump could no longer use the stock market as the gauge for his success during the Coronavirus Crash.

Despite the stock market recovery, the mishandling of the outbreak has cast the Democrats into a healthy lead. Forecasts are now suggesting a Blue Wave will give Joe Biden the presidency and both houses of Congress to the Democrats. A “sweep” may unsettle the market because of the absence of the checks and balances that demand negotiation and compromise, which pulls either wing toward the centre. Instead swift, self-serving decisions may present themselves over important rulings such as the current anti-trust recommendations for big-technology firms. The Democratically controlled House of Representatives just released a massive overhaul that would have major consequences for the largest publicly traded companies, Amazon and Apple. This type of change could be a major catalyst that causes a change in market leaders as we highlighted in our October 2019 newsletter.

Nevertheless, declaring a loss for Trump and the Republicans is still premature. The possibility remains that the gap can be overcome, or it can be tightened enough to contest the election results. A contested election could arise from a simple delay in counting of mail-in ballots or a more serious scenario such as voter fraud. The U.S. presidential election in 2000 was contested when close results in Florida led to a vote recount by hand. The recount ended up in the 9-person Supreme Court. While a delay similar the Bush-Gore controversy may disrupt markets in the short-term, more worrying are the results of a recent Hofstra University survey. This survey showed a significant rise in the number of Americans, both Democrats and Republicans, who feel it is justified for their party to use violence to advance political goals.

While election outcomes and legislation can have adverse impacts on specific cohorts of markets, in general equity markets typically prosper regardless of the political party in office. Studying historical returns, if you exclude the most recent 16 years, the correlation between presidential party and stock market returns is non-existent. The Great Financial Crisis and subsequent rebound sway the results slightly in favour of the Democrats. However, most evident is that returns have more to do with the business cycle than presidents.

Our tactical decision-making process is more aligned with the business cycle than election outcomes. These maneuvers are smaller in nature to strategic allocation decisions, which align with client risk tolerances, but these are never single point decisions. Factors such as valuation, fundamentals and technical indicators are also incorporated into investment decisions. Take big-technology firms, we view the proposed anti-trust investigation combined with valuations as a major concern but are respecting the strong fundamentals and technical price charts.

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