The Final Stretch
September 30, 2020
We’ve reached the final turn in 2020, and I think we’re all ready to cross the finish line and put this year behind us! This will be a quarter for the record books, and it’s anyone’s guess how it will end. Our world has been upturned by a global pandemic, there’s social unrest in the streets, a pending election, sporting events with no fans, schools with no kids, and numerous disruptions to businesses and people’s livelihoods. Our clocks and calendars have been virtually turned upside down. And speaking of calendars and sports, even the Kentucky Derby moved from the first Saturday in May to the first Saturday in September…Spring hats and seersucker were replaced by scarves and tweed! The year 2020 continued to deliver her punches with a major upset, when the heavy 3-5 favorite was outmatched in the home stretch. The only thing that remained constant, was record-setting trainer Bob Baffert won the Derby once again, only to be knocked to the ground by his equine protégé in the winner’s circle. It appeared the young colt was reminding everyone to keep practicing their “social distancing!”
Yes, 2020 itself has been much like a horse race. The first quarter started smartly with the bell ringing and stocks roaring, eager punters holding potential winning tickets with bated breath. However, what looked to be a clean start, quickly deteriorated into a messy grind to the quarter pole when one horse, aptly named “Corona” lost his jockey and proceeded to cut across the entire track, bumping horses and causing riders to pull up on their reins. After the first turn (Q1), a few front runners pushed the pace, when “Zoom”er broke away from the field, followed by “Apple”jack, “Google”me, and Kissmy”Facebook” leaving long-time favorite “Warren” trailing lengths behind the pack. The speed was lightning fast, and the trainer of Nasdaq Stables, LLC was beaming, while disappointed owner Mr. Dow Jones wondered how long they could keep up the pace, as they quickly passed the half-mile pole (Q2). But luck would change half-way through the 3rd turn (Q3), the leaders began to tire, and the breadth of the field (“market”) began to widen, giving older horses, who had proven their winning ability (“cash cows”), a chance to compete. Just as the throng of contenders became more dense, “PPP”Pete and the stalwart filly “RBG” pulled up lame, leaving “Jerome” to steady the pace.
Heading into the final stretch (Q4), it appears to be anyone’s race, filled with much uncertainty, and many trials to come. Will it be “Vaccine-19” or “Stimulus;” or the strong and steadfast “Main Street” which still has a lot of heart! Whatever it may be, we have two contenders in red and blue saddle blankets that are sure to have an impact on the results. There’s the Dark Horse from 2016 on one side, and a career DC insider on the other. Despite the pollsters predicting a Democratic win, the options market is pricing in an enormous amount of volatility around the election and into the rest of the year. If the markets hate one thing, it’s uncertainty, and this election is filled with that. On top of a pandemic, there is controversy over mail-in/absentee ballots, the ability for the post office to deliver, the replacement of a supreme court justice, and negotiations over additional fiscal stimulus.
It is still anyone’s race, however, we see three likely scenarios unfolding in this dead heat finish:
We believe the market has already somewhat priced in this scenario, and therefore we foresee a potential sell on the news, but do not predict a bear market. Corporate tax hikes will most likely occur; however, they may be delayed until 2022 or at least until a COVID-19 vaccine is available which would have a modest initial impact to corporate profits. Some technology stocks would likely suffer under greater Democratic regulatory scrutiny, while infrastructure, clean energy, and healthcare services should perform well.
Biden Wins/Republicans Keep the Senate
In general, markets like a split government and tend to outperform in this environment vs. a single-party controlled régime. The reason being is that a balance of power tends to result in stalemate and very little, if anything, gets done. Therefore, companies don’t have to plan and budget for big changes, or delay business decisions awaiting new laws and policies.
The market should continue to do well provided the economy continues to recover and a vaccine allows the economy to reopen. In addition, the market should take some comfort in the “enemy” you know vs. the one you don’t. Smaller companies should rally along with energy, financials and technology. Trade tensions with China could continue unless a weaker dollar forces them to the table, and the knowledge that they have 4 more years until a change of power creates pressure to make a deal.
All of these scenarios are well and good, however, the biggest unknown factor and the biggest risk to the market is time. When will the American people actually know the results of this hotly contested race? An inconclusive election will most certainly send the market lower and volatility higher (at least in the short-run). Despite the outcome, the underlying economy should continue to improve into 2021. A medical solution is still necessary, however, to get us there and the timing of a vaccine will dictate how quickly we can reopen the economy. While some industries have rebounded more quickly than expected, time is critical to those still on life support.
As America continues to debate (or not), we remain focused on one thing–your portfolio. Where appropriate, we have rebalanced, trimmed winners, and raised liquidity to weather this final furlong, but at the end of the day, history has shown us that who wins the White House doesn’t really matter all that much. We are playing a much longer-term game. It’s not a race, it’s a marathon, which is why a long-term strategic allocation is paramount to success. Like Bull and Bear markets, Donkeys and Elephants will come and go. Our job is to navigate the animal spirits and ensure our clients finish strong, healthy and sound.
Whitney E. Solcher, CFA®
Chief Investment Officer