Dear Clients and Friends:
As we approach the end of this most unusual year, there are many questions on the minds of investors. The upcoming election is currently the primary of these, but there continues to be uncertainty surrounding a new wave of COVID-19 infections, the progress on a vaccine and the timing and amount of the next round of stimulus. Each of these factors will have a material impact on the outlook for consumer spending, economic growth, and corporate earnings.
The race for the White House has taken center stage, with Donald Trump and Joe Biden battling back and forth in key battleground states. It is not uncommon to experience volatility leading up to election day, especially in a close contest where the outcome appears unclear. However, once a winner has been determined, the market has historically moved higher regardless of the outcome, even if it involves a change in power that results in a significant difference in political philosophy and policy. Corporations have shown the ability to adapt and adjust to a new environment quickly, even though some will benefit more than others depending on the political backdrop.
While the presidential race has dominated the headlines, the battle for the Senate likely holds the key in determining how much political change may be implemented. Republicans are in danger of losing their majority, but when examining the number of seats that are contested, Democrats are unlikely to pick up enough ground to enact major policy changes. The market tends to favor a split Congress which we’ve had for the past 2 years, but that may end with Democrats poised to retain control of the House of Representatives.
With fewer voters projected at the polls because of the pandemic, mail-in and early voting have been key topics of discussion. Due to the complicated logistics of highly increased demand for mail-in voting, politicians and pollsters estimate it could be weeks, even months, before the results of the presidential and congressional elections are known. In 2000, when the presidential election was undecided for over a month during the Florida recount, the market declined by 8%. However, once the Supreme Court stepped in and declared Bush the winner, markets stabilized as there was a peaceful transition of power.
Despite a rebound in economic activity since the re-opening, the pandemic continues to threaten a sustained recovery. Initial jobless claims remain stubbornly high and unemployment sits around 8%, near the highs of the 2008 financial crisis. Certain industries have been impaired, including physical retail, energy, and lodging. Cross-state travel has slowed to a crawl, leaving airlines in a precarious position. With daily infection rates spiking to levels not seen since July and flu season just beginning, some restrictions may be re-imposed that could hamper economic activity. Overall, US GDP and earnings still sit below their historical peaks, with Q3 earnings expected to decline -18% from the previous year.
Washington continues to debate the merits of a further stimulus package. Additional unemployment benefits and PPP loans have been exhausted around the country, leading many to plead for additional help from the government. The House and Senate are in gridlock, however, with the price tag and allocation of resources tied to the stimulus providing the main sticking points. Given the proximity to the election, we now believe it is unlikely we will see a comprehensive stimulus package prior to the conclusion of the lame duck session in January 2021.
Overall, the market has was resilient during the summer months, returning to its historical highs. In many ways, stocks have been propelled higher by news of vaccine progress and further government stimulus which has pushed valuations to extreme levels. Should we see a stall in the above factors or disappointing economic data, markets could experience downside volatility. Given these risks and uncertainty surrounding the election, we remain cautious in our portfolios with hedges in place to provide protection.
The coming quarter will be key as many of the current uncertainties plaguing the economy and markets may begin to resolve. In the meantime, we continue to closely monitor client portfolios, taking advantage of opportunities across assets and sectors. In the coming weeks, please feel free to reach out with any questions you may have regarding your portfolio, the election, and our outlook.
Gallacher Investment Committee
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