In a follow-up episode to his immediate post-U.S. elections commentary, Dr. Brian Jacobsen, Senior Investment Strategist for the Multi-Asset Solutions team at Wells Fargo Asset Management, provides an update on the recent U.S. elections and what we now think it will mean for the markets.
Laurie King: I’m Laurie King, and you are listening to On the Trading Desk®. Today we will discuss, for the second time, the results of the November 3 U.S. elections and what it may mean for portfolios.
Our guest again is Dr. Brian Jacobsen, Senior Investment Strategist for the Multi-Asset Solutions team at Wells Fargo Asset Management. Brian has been our guest several times now, sharing his insights about the U.S. elections, the markets, and ways to manage risks surrounding the election. Brian, welcome back to On the Trading Desk.
Brian Jacobsen: Thanks for having me back.
Laurie: To begin, what do we now know about the results of the U.S. election that we didn’t know on Wednesday?
Brian: More results have rolled in. Results still need to be certified, and there will likely be recounts and court challenges, plus the Electoral College doesn’t meet until December 14, but many news outlets called the presidential race in favor of former Vice President Joe Biden.
But there are many more things on the ballot than just the race for President. It looks like Democrats will retain control of the House, but with a slimmer majority. The Senate seems like it will stay in Republican control, but also with a slimmer majority.
But in Georgia, they will have a run-off election for two senate seats. Projections are that at least one of those will go for the Republicans, which means if that’s the case, Republicans would have a 51 to 49 majority in the Senate. Now if neither of those seats go for the Republican candidate, then the Senate would be split 50-50, which effectively would make it a majority Democrat control because the vice president gets to cast a vote if there is a tie.
What I thought was also really interesting and really important, was what happened—or rather, what didn’t happen—with state and local elections. There were very few changes in terms of who’s in the governors’ mansions or who’s in control of state legislatures. A majority of states still have Republican governors and a majority of states still have Republican-dominated state legislatures. That’s incredibly important because we just had the 2020 Census, and new congressional districts get to be drawn, which will be in place for the next 10 years. Now that can help influence election outcomes for the foreseeable future, including the 2022 mid-terms, which are right around the corner. So you know, there’s always an election around the corner.
Laurie: How has the market been reacting?
Brian: Well, so far, so good. It seems like voters voted for gridlock and the markets are voting in favor of it, too. Yields on government bonds went down, probably reflecting the lower likelihood of there being a big fiscal stimulus. Now Senator McConnell did say that Congress should make stimulus the number one priority during the lame duck session of Congress and that’s the period between when they get back and when the new Congress gets sworn in at noon, January 3.
Laurie: Not to complicate things, but how did the Federal Reserve [Fed] react? The Federal Open Market—that’s the voting members of the Fed—met Wednesday and Thursday, November 4 and 5, and announced their policy intentions on Thursday, right?
Brian: This is where I think it gets really interesting. The Fed didn’t make any changes to the stance of monetary policy. However, Chair Powell reiterated his call that increased coronavirus cases is a real threat to the economy, and in his view, the economy will likely need more fiscal support. Yet the Fed made no changes to policy, despite the threat.
And so we have to consider what might happen between now and their next meeting, which is December 15 through the 16. If we get Congress and the President signing off on stimulus before they adjourn—likely by Thanksgiving—then the Fed can probably breathe a sigh of relief, as could markets.
There’s also this continuing resolution that’s been keeping the government funded through December 11 and that could be a good opportunity to get some stimulus passed along with funding the government into the new year.
However, what if there isn’t a stimulus deal? In our view, December 15, when the Fed meets next, would be a little late for more monetary stimulus, since a lot of the income support was needed a month or more in the past, because while the labor market has improved, there are still around 10 million more people unemployed in the wake of the coronavirus crisis than before. If Congress and the President don’t pass stimulus by Thanksgiving, it will likely put pressure on the Fed to maybe take some action a few weeks before their next regularly scheduled meeting.
Laurie: Given the new information from the election results and the Fed, are there any changes to your long-term view?
Brian: We think, tactically, this creates a chance for volatility if we don’t see Congress and the President coming to a stimulus agreement before the holidays. But we think that medium- to long-term, conditions are still favorable for risky assets like equities, because if Congress doesn’t act, the Fed might.
Considering gridlock should broadly maintain the status quo in terms of legislation, especially tax legislation, and the only thing likely to come out of a divided government would be like an executive order or pieces of legislation that have bipartisan support, we think it’s long-term positive for equities. The near-term risks are considerable, though.
Laurie: What do you think investors should keep top of mind about their portfolio risk exposures, both equity and fixed income?
Brian: When we look at the balance of risks, central banks are staying accommodative, the political picture is beginning to clear, and the economy should continue to heal. For us, it means we expect rates could rise, as we look out a year, while equities also rise. We’d rather take on equity and credit risk than take on too much interest rate risk. Within equities, we do think cyclicals, like small cap, value, and emerging markets, will have their time to shine.
Laurie: Before we end, do you have any last thoughts for our listeners?
Brian: Balance is really important, but so is patience. Psychologically, we’re prone to procrastinating and to thinking that there are more near-term risks than long-term risks. It doesn’t help that we seem to move breathlessly from one apparent crisis to the next. So don’t let near-term worry distract you from your long-term goals.
Laurie Thank you again, Brian, for sharing your perspective about the election results and what it may mean for the markets and portfolios.
Brian: Thanks so much! It was great being here.
Laurie: That wraps up this episode of On the Trading Desk. If you’d like to read Brian Jacobsen’s weekly blog, you can visit our AdvantageVoice® blog. Our full range of Investment Perspectives can be found by visiting http://on.wf.com/6129H8jRt.
To stay connected to On the Trading Desk and listen to both past and future episodes of our program, you may subscribe to the podcast on iTunes, Stitcher, or Overcast. Until next time, I’m Laurie King; take care.
CFA® and Chartered Financial Analyst® are trademarks owned by CFA Institute.