Against a backdrop of an ongoing pandemic, extreme social unrest, economic suppression, and increasing distrust in our shared public institutions, the 2020 US presidential election couldn’t come at a more turbulent time. While we can control our risk management, our portfolios, and our reactions to events, we cannot control the events themselves, nor can we predict the outcomes. Focusing on areas over which we have some control, instead of those we do not, is likely to lead to better results and less angina along the way.
The presidential election will be held on November 3. In an effort to help investors to prepare themselves and their portfolios for the volatility that may accompany the event, we focus on the election's investment implications.
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With President Joe Biden inaugurated and the 2020 election cycle complete, our focus now turns to the new administration’s policy agenda and what it means for investors’ portfolios. For our current views throughout this presidency, visit ubs.com/cio-potus46.
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The current economic and market environment
Scott Baker, an associate professor of finance at Northwestern University’s Kellogg School of Management, publishes a widely followed index of economic uncertainty. The accompanying chart, a global version of the index, is a visual confirmation of what many investors have felt over the first half of 2020. High economic policy uncertainty, which historically has been associated with lower economic growth and is believed to increasingly be a cause of large equity price movements, reached dramatic new highs in May (Fig. 1).
Against the COVID-19-induced economic suppression, global interest rates cratered (Fig. 2) and equity markets produced four of the seven largest daily moves in the last 50 years (Fig. 3). The market recovery notwithstanding, we’re not out of the woods yet. Market participants, reasonably, expect volatility to remain high into the fall (Fig. 4).
In this context, large market moves are neither irrational nor unexpected. The good news is that none of the election outcomes—even a Blue or Red Wave—are likely to have as significant an impact on markets as COVID-19. Even so, elections do have consequences. It’s currently too early to be highly confident about the election or policy outcomes, but the result will, on a relative basis, create winners and losers within the equity market, have an impact on tax policy, and shift the drivers of macroeconomic growth and risks to that growth.
The expected impact from potential election outcomes
While positioning portfolios today for a specific outcome in November is ill-advised, it’s important to recognize that Trump and Biden have promulgated divergent economic and fiscal policies. In a second term, we believe President Trump would focus on deregulation, an “America first” approach to international trade, and tax reductions (which may consist of making permanent the 2017 Tax Cuts and Jobs Act). By contrast, Joe Biden would seek to increase spending on climate change mitigation, expand access to federally funded healthcare, and raise taxes on corporations and high-income earners. The need for more infrastructure investment is among the few issues on which both candidates agree, but neither candidate has outlined how to pay for the public improvements.
The composition of Congress, geopolitical developments, and the state of the economy in 2021 all will influence how the next administration will function. There are four plausible electoral scenarios, two of which result in a unified government (Blue Wave or Red Wave) and two with a divided government (either Trump or Biden with a Republican Senate and Democratic House). For each scenario, we forecast the likely impact on the US economy, equities, and fixed income at ubs.com/electionwatch.
How to invest between now and November
Although the November election looms large, it should not be the determining factor in constructing investment portfolios. In fact, the starting point in preparing portfolios for November is to take a step back and ensure you are appropriately allocated—based on your specific circumstances—in the first place. Our Liquidity. Longevity. Legacy.* framework is a process for doing so that can help every investor find the right balance between risk management and potential wealth accumulation.
Even with a disciplined investment approach, the temptation admittedly exists to position portfolios to take advantage of, or hedge against, potential election outcomes. We caution investors against doing so at this time, but rather to be flexible to alter their portfolios as new information arises. The election outcome is still uncertain and positioning a portfolio right now for a specific outcome leaves it vulnerable to the good chance that another outcome, with different market consequences, materializes.
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