Markets were mixed this week as they digested an enormous amount of news that ranged from generally positive corporate earnings and plateauing COVID cases/hospitalizations in key U.S. hotspots, to second-quarter GDP data, to stalled fiscal stimulus negotiations, and an increase in continuing jobless claims. The MSCI ACWI Index, which represents global equities (i.e., both U.S. and international stocks), closed the week up 0.7, while core U.S. bonds on the Bloomberg Barclays Aggregate U.S. Bond Index was up 0.2%. The S&P 500 finished up 1.7%, the U.S. small cap Russell 2000 was up 0.9%%, while the
Current data related to COVID-19 remains mixed. On the one hand, it suggests that new COVID cases may be peaking in Florida, California, and other hotspots. However, according to NIAID Director Dr. Anthony Fauci, Ohio, Indiana, and Tennessee could be on the cusp of new outbreaks.
Congress continued work this week on a fifth stimulus package, titled the HEALS Act. There is still a wide gap between Republicans and Democrats on key points of the bill, but expectations are that the finished product may be worth roughly $1.5 trillion. Like past stimulus packages, the passage of this bill should work to support markets. However, there is likely to be market volatility in the near-term as negotiations drag on. Failure and/or delay to reach a deal would be a negative from a market perspective, but at this point, both sides have consistently stated that they want to reach a deal in the coming weeks.
As it relates to the economy, on Thursday, the Commerce Department reported a record 8.3% contraction in U.S. GDP during the second quarter or an annualized contraction of 32.9%. While the collapse was dramatic, it was slightly better than expectations — early estimates predicted a 34.7% decline. As we have mentioned in the context of corporate earnings reports, financial markets have largely written off the second quarter and are focused instead on economic activity during the second half of 2020 and even more so, into 2021. Thursday’s GDP report reflects what has occurred — not what is yet to come for the U.S. economy and investment markets. In general, the U.S. economy saw increases in May and June.
U.S. Election Preview
The November elections are less than 100 days away. This week, and in future commentary, we will look at the potential impact the upcoming election could have on the markets. Our business and the goal of our commentary is not to weigh in on politics, but to offer you an objective, bipartisan perspective on the economic and market implications of the contest as it unfolds.
Historically, control of the White House has had very little effect on the performance of U.S. equity and bond markets. Since 1880, Republican presidencies have returned 8.2% annually in a balanced portfolio, while Democrat administrations have returned 8.4% annually, as this chart illustrates:
A Trump win in November would likely result in a similar environment to the one we experienced from 2017 to pre-pandemic 2020 (lower taxes, deregulation of business, etc.). This tends to be a market-friendly environment. Recent policy proposals from former Vice President Biden’s campaign have led some to wonder if a Biden win would disrupt the markets. Our perspective is that although we could see higher corporate taxes under a Biden presidency, the increase could be offset by policies that would be positive for financial markets, such as an increase in infrastructure spending and de-escalation of trade tensions with China.
Higher Corporate and Personal Taxes
Under President Trump, the corporate tax rate was lowered from 35% to 21%. Biden has stated that his policy is likely to split the difference between 21% and 35% and propose a corporate tax increase to 28%. This increase may result in a modest hit on earnings for U.S. companies. Further, if the economic recovery we are starting to experience continues fitfully or in a slow manner into 2021, we think there could be pressure for Biden to delay increasing corporate taxes until 2022.
Infrastructure & Renewable Energy
Biden is calling for an investment of $2 trillion over four years in “green energy and infrastructure” as a way to curb climate change, create jobs, and spur economic growth during his first term in office. While there would be a price tag for taxpayers, we believe this investment would support U.S. equity markets in the near- and medium-terms.
De-escalation with China
Trump has been at odds with China throughout his presidency, and we have seen the deterioration in U.S. / China relations bring volatility to the market. While Biden shares many of Trump’s views on China, a Biden administration would be more likely to reduce bilateral tariffs in favor of a coalition-based approach to opposing China and influencing change. Recent estimates suggest that tariffs have negatively impacted U.S. earnings by as much as 5%.
The Net Impact
It might seem that the higher taxes implicit in Biden’s policy proposals could hurt equity markets if he were to win. But other portions of his policy, such as an infrastructure deal and de-escalation with China, would likely offset any negative tax impact. In our view, Biden’s economic policies and China relations would likely have a neutral or even slightly net-positive impact on markets from current levels, although possibly not as positive as Trump’s.
Over the long-term, stock prices and market performance are driven fundamentally by growth, productivity, and innovation; regardless of policy or which party sits in the White House, corporations will adapt to a changing landscape. For example, during this pandemic, many companies shifted their business models in direct response to changes in government policies, including looking to accommodate curbside pick-up, online ordering, outside seating for restaurants, etc.
Currently, our opinion is that investors should keep in mind that historically political developments have proven to be mostly short-term noise, and making investment decisions based on policy anticipation is likely short-sighted. As we cited at the beginning of this section, there is no statistical significance between market returns and the party that controls the White House. Elections do bring near-term volatility in response to the uncertainty that precedes any significant transition. Still, we think that the long-term implications for investment markets of the 2020 U.S. elections will be relatively small.
As a result, our advice is to understand that there likely will be increased volatility as we prepare for November’s elections. This mindset will help you stick with (not deviate from) the personalized, diversified asset allocation strategy you have in place, which is designed to meet your financial goals and time horizon.
If you have any questions about this week’s newsletter or the markets, please do not hesitate to reach out to your personal advisor or either of us. We are here to support you, your family, and your wealth during this unique and challenging time.
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