Market Outlook | Fall 2020

It is difficult to write about the direction of the US economy without discussing the November presidential election.  Rarely do voters face a choice that offers such a disparity in vision for economic policy.  The economy determines the direction of the stock market.  The economy’s course often depends on government policies.  Recently Barron’s polled money managers about their opinion of the upcoming election, the potential effect on the stock market, and economy. 

The results are:

Who will win the November 2020 Presidential election?

54% Biden

46% Trump

Which candidate, as President, would be best for the stock market?

75% Trump

25% Biden

Which candidate would be better for the economy?

Trump 60%

Biden 40%

Below are our thoughts on the election and the markets.

Trump wins:

Lower taxes, less government regulation and other business friendly incentives (tax deduction for food and entertainment) will likely return.  It is also likely that a relatively small, targeted economic stimulus bill would be passed in a second term, assuming Speaker Pelosi and Treasury Secretary Mnuchin do not agree to one before the election.

Biden wins, but Republicans hold the Senate:

The market typically likes divided government better than a unified one.  Although this option likely takes the issue of court packing off the agenda, it also makes a large economic stimulus plan less likely.  The stock market focuses on the later.

Biden wins and Democrats control the Senate: 

This seems to be the most likely scenario based on the polls and betting markets.  Although some may fear this combination would be the least business friendly option, the stock market appears focused on the potential for fiscal stimulus.  In fact, a “blue wave” would increase the likelihood of a package in the neighborhood of the $3.4 trillion Heroes Act, originally proposed by Speaker Pelosi and passed by the house in May.  Although one can question the long-term benefits of adding this much debt to our country’s balance sheet, the impact on corporate earnings in 2021 would likely be very positive. 

Neither candidate concedes on election night:

This is also known as the Bush/Gore election re-do and would be an absolute nightmare for the financial markets.  I would expect stocks to decline 5-10% in the near term and another 1% or so each week the results are delayed.  One certainly hopes the election results aren’t decided by a 5-4 majority in the US Supreme court!  Although this is unlikely, the thought of the civil unrest and division this result would yield is indeed scary.

Conclusion:

The primary driver of our economic policy this year has been the Federal Reserve Bank.  “The truth is most money managers are less concerned with who wins the election than they are with Fed policy”, says John Stoltzfus Oppenheimer asset manager.

The Fed has provided liquidity in abundance for corporate America.  Chairman Powell has been consistently calling for additional Fiscal stimulus from Washington DC to compliment the monetary stimulus the FRB has provided.  In the meantime, if the economy opens and we experience a V shaped recovery, stocks will go up.  If we experience a slowdown, the Fed will lower interest rates again and stocks will go up.  There is just too much cash on the sidelines ($5 trillion at last count) to bet against the stock market at this point. (source: Barron’s 10/17/20)