In today’s podcast, we will speak with Dr. Brian Jacobsen, Senior Investment Strategist for the Multi-Asset Solutions team at Wells Fargo Asset Management about the U.S. elections that took place yesterday on November 3 and what the election outcome may mean for portfolio risks.


Laurie King: I’m Laurie King and you are listening to On the Trading Desk®.

Today we will discuss the results of the November 3 U.S. elections and what it may mean for portfolios.

Our guest today is Dr. Brian Jacobsen, Senior Investment Strategist for the Multi-Asset Solutions team at Wells Fargo Asset Management. You may remember that Brian was our guest a month ago on October 7, and on that episode, he talked about the upcoming 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 happened? What do we know about the results of the U.S. election?

Brian: Well, it looks like there was a lot of voter enthusiasm, and it wasn’t just one party or the other. It was really across party lines, and we could actually see voter turnout at near-record levels.

The results are not all in yet. As of the time of recording on Wednesday morning, we’re still waiting for the results from important swing states, which could determine whether either presidential candidate gets a majority of the Electoral College votes.

But it looks like instead of a Blue Wave or a Red Wave, which describes if it was like a sweep by the Democrats or a sweep by the Republicans, instead we’ve ended up with a mix of blue and red. So it’s purple. And it might be more like “Purple Rain” of gridlock, with all apologies, of course, to Prince for using the title of his famous song.

The Senate may stay under control of Republicans, though it looks like they might go from 53 out of the 100 seats down to 52. But more surprisingly, at least based on what the surveys were predicting, is that the Democrat majority in the House could diminish by about four seats.

Now the timeline to getting to final results is that we should know a lot more by Friday. However, Nevada, they are allowing ballots to come in until next Tuesday. So, the process, it’s in place. It seems to be working, but it’s just a little bit slower than in previous elections, mainly due to the number of absentee and mail-in votes.

Laurie: What was the initial market reaction?

Brian: The original market reaction was quite interesting. It was kind of up and down and all around. But it settled on an up direction with the tech-heavy futures contracts gaining the most, perhaps on the expectation that with gridlock that there’s less likelihood of massive regulatory changes to affect their operating environments.

It may also have helped the tech sector that Californians approved Proposition 22 such that so-called “gig workers” for some of the drive-sharing companies that don’t have to be considered employees. Their stocks shot up after that was passed.

Now with Treasury yields, those were also all over the place with the 10-year Treasury yield rising early on when it looked like Democrats could sweep the houses of Congress and the White House, but then yields moved sharply lower when it looked like we’d get a divided government result. And that could be reflecting the shifting expectations about further fiscal stimulus. It’s likely now as we’re sort of settling down becoming more of a fading dream as we enter into the reality of gridlock.

Laurie: Does this look like a temporary dislocation?

Brian: My team talked about whether this was a dislocation or not, kind of throughout the night and also this morning, and we think the market got the reaction right, for the most part. With less chance of fiscal stimulus, yields moved lower, and the more cyclical parts of the market like smaller caps and more value-oriented names, those lagged. But we were still broadly up in the markets reflecting maybe relief that the results—though we don’t know when we will know for sure—that the results should maintain the status quo in terms of the important policy dimensions, or at least most of them.

Laurie: And what’s the longer-term view? Last time, you told me that “when it comes to looking at election, it’s helpful to think about three categories of policies and how that might affect the economy. One is fiscal policy. Another is regulatory policy. And the other one is foreign relations or foreign policy.”

Brian: Well, the longer-term views—let’s talk about those policy dimensions that we were considering.

On the fiscal side of things, there’s less chance of a big stimulus package, but there’s also less chance of tax hikes.

On the regulatory side of things, the President can affect things, but it will likely be limited to things around energy policy, like where companies can drill for oil. Major regulatory changes seem unlikely with divided government.

On the foreign policy side of things, that’s where the results could be a bit more interesting. A President Biden would likely coordinate more with allies when it comes to geopolitical situations, like the situation with Iran. He could also try to coordinate more in terms of, say, climate change, because I don’t think it was a coincidence that as of today, under President Trump, that we have exited the Paris Climate Accord. President Biden might try to bring us back into that. And then President Biden, he might also try to coordinate more in terms of trade policy.

Now on balance, when you consider these three different dimensions, the direction of the economy is likely much more important than the change in power. Now unfortunately, that means we are probably once again beholden to headlines and the timeline to a vaccine. We do remain optimistic about that, and so as a result, we have stayed positive on equities.

Laurie: In terms of risk exposure in portfolios, what are some of things that you’re doing to manage that?

Brian: Well, going into the election, we lightened up on risk exposures, especially our call that yields were moving higher. And in hindsight, we’re glad we did as yields have now moved lower.

Laurie: Of course, the pandemic is still with us despite election results. What’s your outlook for the economy?

Brian: Well, we think the next leg higher for equities will likely be dominated by what was working early in the recovery, which is large-cap growth. Smaller caps and value companies tend to be more cyclical, and their time to shine might have to wait until we get widespread availability of a vaccine.

Laurie: Before we end, do you have any last thoughts for our listeners?

Brian: Well, I think it was Yogi Berra who said, “It ain’t over until it’s over,” so we still do have to watch what results roll in. Remember that the mid-term elections, though, are right around the corner, so we can go through a slimmed down version of this election season soon enough.

Laurie Thank you, Brian, for sharing your perspective about what election results may mean and how it may affect portfolios.

Brian: Thanks so much for having me. This was a lot of fun.

Laurie: This wraps up this episode of the On the Trading Desk® podcast. If you’d like to read Brian Jacobsen’s weekly blog post, you can visit our AdvantageVoice® blog. Our full range of Investment Perspectives can be found by visiting www.wellsfargoassetmanagement .com. To stay connected to On the Trading Desk and listen to past and future episodes of our program, you can subscribe to the podcast on iTunes, Stitcher, or Overcast. Until next time, I’m Laurie King; take care.

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