As the November US presidential election draws closer, many equity investors have asked for our views on how the election results could determine the US stock market’s overall direction. It’s an understandable concern considering we are at the point of the US presidential election cycle when President Donald Trump and Democratic presidential nominee Joe Biden are starting to debate policy issues and their plans for the US economy.
Although many investors seem to believe that a Biden win would mark an end to the Trump era’s business-supportive policies, we don’t think that is necessarily true. In our view, whichever administration is victorious will likely have to continue to tackle the most significant issue facing markets right now—the US economic recovery from the COVID-19 pandemic. We believe a Biden presidency with a split US government could actually be a favourable scenario for the market as we would expect more incremental policy proposals/shifts from the new administration.
That said, we don’t think a split Congress with either Biden or Trump as president means no meaningful US legislation will pass. We see bipartisan support between the Democrats and Republicans in policies related to continued fiscal support for the economy, a long-awaited infrastructure bill and trade.
US Elections: Areas of Bipartisan Support
We believe an infrastructure bill will be a priority of either administration in 2021. Looking forward, we have confidence that we’re going to see legislation to upgrade the nation’s airports, bridges and roads. In our view, these are the pieces that make the country move and are more likely to find bipartisan support than areas like green energy infrastructure, which may be more partisan in nature. According to our research, the plan would also likely include significant funding to improve America’s technology infrastructure, such as access to broadband and fifth-generation [5G] wireless technology. In fact, we think technology is front and centre in many potential post-election policy changes.
On the topic of trade policy, there is bipartisan support to protect intellectual property. We believe that Biden would continue to pressure China to ensure a level playing field for tech globally if he were to defeat Trump, despite a perception that he might take softer posturing. We would expect trade tensions to continue under either administration.
We also see support on both sides to bring manufacturing back to the United States. Our sense is the COVID-19 pandemic has exposed many weaknesses in global supply chains, specifically within the health care sector, and expect other sectors, such as industrials and manufacturing, to continue to move closer to end market consumers in the United States. We would expect to see growing bipartisan support under either administration, as these trends can contribute to job growth.
Will a “Blue Wave” Lead to US Policy Changes?
Despite these areas of bipartisan support, we see the prospect of a blue wave or a Democratic sweep worth monitoring. Under this scenario, Biden becomes president and the Democrats gain control of the Senate and retain control of the House of Representatives. In our view, many investors and market participants share concerns about a single party having unchecked power across all three branches of government.
According to our analysis, the US stock market’s biggest fear seems to be that a blue wave would lead to a very dramatic shift for policies towards business, markets and regulation. Some frequently discussed issues are an increase in corporate taxes, drastic changes to the health care system or regulation of some of the country’s largest technology companies.
Under any election outcome scenario, we will monitor potential policy changes very closely, as well as the possible changes to affected companies’ business models. Our role as active managers is to discern how these issues may present risks or opportunities in the market.
While US elections and related implications can create near-term uncertainty, our focus remains on identifying opportunities for our investors. Technology and health care are two sectors that we believe will continue to see long-term growth. We continue to like the prospects for select companies in these sectors with strong earnings per share and free cash flow.
In the meantime, we believe investors should prepare for bouts of market volatility until the elections are behind us. Markets like certainty, and there are currently many unknowns. Polls currently show a tight presidential race, and we believe the election is likely to remain tight right up until we receive the election results.
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What Are the Risks?
All investments involve risk, including possible loss of principal. The value of investments can go down as well as up, and investors may not get back the full amount invested. Stock prices fluctuate, sometimes rapidly and dramatically, due to factors affecting individual companies, particular industries or sectors, or general market conditions. The technology industry can be significantly affected by obsolescence of existing technology, short product cycles, falling prices and profits, competition from new market entrants as well as general economic conditions. Investments in fast-growing industries, including the technology and health care sectors (which have historically been volatile) could result in increased price fluctuation, especially over the short term, due to the rapid pace of product change and development and changes in government regulation of companies emphasizing scientific or technological advancement or regulatory approval for new drugs and medical instruments. Investments in infrastructure-related securities involve special risks, such as high interest costs, high leverage and increased susceptibility to adverse economic or regulatory developments affecting the sector.