Beyond Bulls & Bears


US 2020 Election Investment Pulse: The Only Certainty is Uncertainty

With just one day until the 3 November US elections, our Head of Equities Stephen Dover joined Templeton Global Macro’s Katie Klingensmith and Fiduciary Trust Company International’s Gene Todd for a discussion about what they are keeping an eye on as investors. They explain why they think in times of uncertainty it’s so important to keep a long-term view, and why potential investment opportunities abound no matter who is in the White House.

Here are a few highlights from the conversation today:

  • “Be very careful about putting your own opinion into how you invest…”- Stephen Dover
  • “A blue wave is just a different structure of the economy that will produce a lot of different opportunities that we’ll be looking at it in a different way than we have over the last four years.” – Stephen Dover
  • “I think everyone should always keep in mind the market does not represent the economy and really knowing and predicting what is going to happen in the economy is not a very good predictor of what will happen in the market.” – Stephen Dover
  • “We’ve been talking about COVID for eight months now, and we thought that maybe we were behind it. We’re not behind it…We’ve had some good news on the job front…but we have so much further to go.” – Gene Todd
  • “There’s tremendous uncertainty out there, and we think the only certainty is uncertainty at the moment…. I would encourage people not to do anything rash because of the political environment, but it’s important to stay diversified. ” – Gene Todd


Katie Klingensmith: Welcome everybody. I’m excited to welcome you to the first in a new series that we’re hosting here at Franklin Templeton, the Election Pulse series. I’m Katie Klingensmith and I’m with Franklin Templeton. I’ll introduce my guests in just a minute, but first I want to say a few words about what I think will be a really interesting conversation over the next nearly three weeks. As many of you know, Franklin Templeton merged with Legg Mason back this summer. And that has even increased further the breadth of expertise that we have available within the Franklin Templeton family of companies. We’re going to be leveraging so much of that intellectual capital through November 17th or longer if we need to, by bringing in experts from any number of different active asset managers, different perspectives around the world and within different investment spaces. For example, we’ll be taking some deep dives into managing volatility, which unfortunately seems to be very relevant right now.

We’re looking at asset allocation, bringing in some of our managers who focus on equity markets, fixed income markets, including with a global perspective and a real emphasis on Europe. We’ll also be taking a look at real estate investing, on munis. So I think it will be a really exciting series. I’m always here, same time, same place, but also this conversation will be recorded and distributed in a lot of different places. You can find it on our website. You can also find it as a podcast and we’ll be doing a blog with the content every day. That leads me to introduce our first speaker, Stephen Dover. Stephen is the head of the equities business at Franklin Templeton. He’ll also be the host of the series. You’ll see me a little bit, but Stephen will be facilitating conversations, engaging with investment leaders from across the organisation. Today, I get to interview him. Welcome Stephen.

Stephen Dover: Thank you, Katie.

Katie Klingensmith: Our second guest today is Gene Todd. Gene is an executive vice president and the director of client development at Fiduciary Trust International. Fiduciary is part of the Franklin Templeton family of companies, and it’s a preeminent wealth manager focusing on managing, investing with individuals with endowments, really thinking about the planning and how to manage investing for those individuals making those decisions. I want to welcome Gene to the conversation. Welcome Gene.

Gene Todd: Good morning, Katie. Good morning, Stephen. Good to be with you all. And as you mentioned, glad to be representing Franklin Templeton’s Fiduciary Trust business. We’ve been part of Franklin for 19 years and we’re a full-service wealth manager. And as you pointed out, our offering is about investment management, retirement planning, trust and estate planning, tax planning and family office services.

Katie Klingensmith: It’s wonderful to have you be part of the conversation. And today we really want to lay the groundwork for what’s going on from an economic and investment perspective. I know there’s so much information, too much information about what’s happening with the elections per se, but let’s see with the help of these two individuals we can really start to focus on what matters to investors. There is so much out there that is driving how people think about their portfolios, how people think about the economy. Just to start us out, what are some of the sources of uncertainty that you’re really thinking about with your clients right now?

Gene Todd: Thanks Katie. Yeah, there’s tremendous uncertainty out there, and we think the only certainty is uncertainty at the moment. So, our CIO, Ron Sanchez, put together a very poignant piece that talks about the risk out there that investors are focused on. I mean, we’re eight months into life with COVID and we think that we’re entering an inflection point. We’ve had this steep recovery, we’ve had this “V” in terms of equity indexes, and in terms of GDP, but the snapback economically has slowed down a little bit. And so what we’re focused on and what we’re thinking investors are worried about is that the economy has only regained about 52 of the 22.1 million jobs that have been lost. And there’s so many layoffs out there looming. So that’s a concern that people are nervous about.

COVID, we’ve been talking about COVID for eight months now, and we thought that maybe we were behind it. We’re not behind it. We’ve got cases increasing. We have hospitalisations increasing. And so people are very concerned about that and are we going to be able to get that under control. Stimulus, we thought we’d have phase-four deal done. And we weren’t that far off, we were about US$300 billion off of having a deal for stimulus four done. So I don’t know, is it going to happen in the next 30 days, is it going to happen in the next three months? We need to get stimulus. And then finally election, maybe we’ll have some clarity tomorrow night. Okay. Maybe we’ll have a Biden victory. Maybe we’ll have a blue wave. Maybe we’ll have a split government. Maybe we’ll have a contested election. So all of those things are weighing very heavily on investors’ minds right now.

Katie Klingensmith: There’s so much to think about. I want to probe just one piece of that before we bring Stephen in. You mentioned jobs; obviously, there’s been some recovery in the employment situation in the US, but I think for many people who are still without work, it’s not nearly enough. I know consumption is another part of this puzzle. What do you think are the big drivers there for seeing a more robust recovery?

Gene Todd: So we’ve had some good news on the job front, as I mentioned, we lost 22.1 million jobs in March and April, and we’ve regained more, a little bit more than half of those back. So, we’ve got an unemployment rate of 7.9%. It’s been going in the right direction, but we have so much further to go. So, you’ve got states like Nevada, like California, like Illinois, like New York, like Massachusetts, those states are much higher than the national average. And so until we start to see those states get better on the job front, then the economy being able to further expand is in jeopardy.

Katie Klingensmith: And certainly, this underscores the focus on stimulus right now with at least some regions and urban areas in the United States suffering so much. Stephen, this is I think, a puzzle for a lot of us. And we’ve been talking about this since the recovery after the big selloff in March, that we really have a big, really big difference, at least in some people’s minds, between what’s going on in the real economy and what’s going on in US and global equity markets. How do you think about this?

Stephen Dover: Well, I think that everyone should always keep in mind that the market does not represent the economy and really knowing and predicting what is going to happen in the economy is not a very good predictor of what will happen in the market. Probably just an example of that is the economy with the biggest growth, of course, over the last 20 or 30 years has been the Chinese market. But if you knew that, if you were a perfect economic forecaster and therefore invested in the Chinese equity market, you would have been behind many of the other markets in the world, including the US market. The makeup of the market is really the companies that are in the market, which are market-cap weighted for the most part. And right now, what’s happening in the United States is there are a few companies, we all know those are the FAANG companies or the tech companies that have actually had their profits accelerate and their revenues accelerate, and have been well-prepared for this COVID economy. And they’re doing very well. They’re profitable and their prices are quite high, but that doesn’t necessarily represent what’s going on in the economy as a whole. So, I think we have to separate those two. I completely agree with Gene that over the longer period of time, we have to have an economic recovery.

Katie Klingensmith: Absolutely. Maybe you could put this into context a little bit for me, Stephen. I know that you work with equity teams of many different styles, in all of the regions of the world, and I know that there’s been very different dynamics across the different equity markets. Do you feel like, and I want to bring Gene in here, too. Do you feel like even with this big recovery in equity markets, that with all the uncertainty with the US elections and other sources of uncertainty, it makes sense for people to stay invested.

Stephen Dover: It certainly makes sense for people to stay invested. I think today, Monday before the election, is one of the great examples. I strongly recommend that people don’t make big investment decisions over the course of this next week, despite whatever happens as the election results come in, it really pays to make long-term decisions. All indications are that short-term decisions are not very fruitful for almost all investors, including professional investors. And at this point, stocks still look like a very good opportunity over the long period of time. Now we’ve got a couple of great weeks ahead of us in terms of this show, where we’re looking at all types of different investment opportunities, depending on your investment objective. And of course you want a diversified portfolio, so you don’t want to just be in equities, but at this point, equities still look like a very positive opportunity for most investors over the longer term.

Katie Klingensmith: Now Gene, I want to bring this back into the economic context. I mean, you mentioned a lot of the different sources of uncertainty or the challenges, but you also mentioned stimulus and when we are thinking about the landscape going forward. What do you think we do know right now? Like what, what would you expect would be likely regardless of what happens on Tuesday or regardless of the outcome that we learn about over the next couple of weeks?

Gene Todd: Well, and one thing that we know is that earnings season, which is about halfway complete, it’s pretty strong. We’re more than halfway through in terms of companies reporting. And 85% of the S&P [500 Index] has exceeded their earnings forecasts. And that compares very favourably historically. So, earnings are coming in very strong. The other thing that we know, it may take a couple months to pan out, but we’ll figure out this election, we’ll have some certainty. We will know who the president is. And we will know who represents and controls the Senate. The House isn’t in question, but we will have economic certainty. We will have certainty around the election. We do know the Fed is going to be loose for a long time. So we’re going to have a low-interest-rate environment for years to come certainly into 2023, maybe 2024 rates are going to stay low, and we will get stimulus. Again, I don’t, I don’t know if it’s going to happen in the next 30 days, but it will happen. There are a lot of people out there suffering. And so stimulus is on the way. So those are some things that we know are going to happen. They’ll happen relatively soon and that’s going to create an environment that’s absolutely fantastic for equities.

Katie Klingensmith: Interesting. So, you also would advise people at this moment, even with the uncertainty that we’ve identified to not back away from taking investment risk in their portfolio?

Gene Todd: I would encourage people not to do anything rash because of the political environment, but it’s important to stay diversified. They always say there’s no free lunch—they’re wrong, free lunch is diversification. Be diversified, not only in the United States, but there’s a whole big world out there. We talk about how the US market cap represents about 60% of the world’s market cap. The way we see that is 40% of the world’s opportunity is outside of the US, so people should have an allocation to Europe and Australia and the Far East, and certainly don’t forget emerging markets.

Katie Klingensmith: Absolutely. Well, and Stephen, I know that you obviously are managing equity teams, but also have thought quite a bit about individuals and their investment choices. And I’ve heard you talk about this tension sometimes between managing uncertainty versus managing risk. How do you think about that in today’s environment?

Stephen Dover: Well, I think it’s an important distinction. There are things we have no possibility of knowing. That’s uncertainty. And we have things that there’s a probability of knowing, and as portfolio managers, we manage risk, which there’s a probability we can manage around risk. So even the election outcome, the likelihood of the path of the economy, those are risks that we can take care of in our portfolios. Uncertainty is really the unknown and that unfortunately has been the path of the virus at this point. And so, in your portfolio, when you have uncertainty, you want to be careful for that uncertain behaviour. If I may also just comment on stimulus, I think the markets are a little bit short-lived—equity markets, particularly—but all markets, the real valuation is in the income streams they’re going to have over a very long period of time.

And that’s why the markets recovered, because even though this has been a very bad year in general for earnings for a lot of companies and for the economy, the prediction is that over time, all those companies are going to recover and they’re looking at those future earnings and that’s especially important in a low interest- rate environment. But stimulus by its very nature is very short term. And so, while that’s important in the short term for earnings and for the equity markets, we really have to be long-term investors and look at how companies or other investments are going to operate over a very long period of time—and that’s risk. And that’s something that portfolio managers can help with and can manage.

Katie Klingensmith: Absolutely. Hey, I want to pick up on one source of uncertainty that a lot of people are talking about and you are both emphasiding that we need to be longer term in the way that we approach investment decisions. But in the short term, how worried are you, Stephen, about a contested election?

Stephen Dover: Well, first of all, I’m not sure my personal opinion is important. And I would say that to other investors as well; be very careful about putting your own opinion into how you invest. So what are the markets telling us? The markets are telling us that there’s some probability of a contested election. I’d actually make that a plural, there may or likely may, not be a contested presidential election, but it’s highly likely that there’ll be some contested Senate elections, so we may not know the outcome of the Senate for a few days. And of course, we don’t know the outcome of the election. And this is an election where fairly big economic factors are at play and they will have an impact on the market. And so, we’ll be looking at that over the next few days and there’s a lot of opportunity there. But I think at this point, probably one of the best indicators of what is likely to happen is the market, because those are people taking all the polls, everything else, and trying to make decisions on that, that affect their own portfolio.

Katie Klingensmith: Absolutely. So, it really is thinking about those short-term risks but remember to put them in a long-term or objective perspective.

Stephen Dover: That’s right. Over the long term, it doesn’t make that big a difference what political changes there are, but in this case, there will be differences, and the market will adjust based on the outcome of the election.

Katie Klingensmith: Absolutely. So, one more specific question and Gene, did you want to jump in there?

Gene Todd: Yeah, I really wanted to jump in. I agree 100% with what Stephen was talking about, how people should stay, investors should stay invested in this market. And I want to introduce a concept that we’ve been talking a lot about with clients. This is that concept of TINA. There is no alternative. Okay. So, what are you going to invest in that’s going to do better than stocks over the long-term right now? It won’t be bonds given where yields are and prices. It won’t be cash; basically, a bank isn’t going to pay you anything for your cash. And so we really think that there really is no alternative to equities over the long term for investors who are looking for a return, you’ve got an S&P [500 Index] with a dividend yield of 1.75%. Can’t get that in bonds. Can’t get that in cash. And of course, you’ve got the upside potential as well associated with equities.

Katie Klingensmith: Absolutely. Thank you for that. I do have another question for you Gene, before we start to wrap up our conversation for today, you’re obviously working with private clients, and there are any number of policy issues that really are potentially on the ballot here. I mean, I’m thinking about tax policies, fiscal issues. Are there particular topics that you are really looking out for that are contingent on the election results?

Gene Todd: Well, what we’re focused on with respect to talking to clients about potential changes is around a blue wave. Don’t know if that’s going to happen, but that’s has dominated the conversations that we’ve had. And if we do have a blue wave, then we think that we’ll see an increase in taxes. We’ll see potentially an increase in regulations. We’ll see, hopefully an uptick in infrastructure, the green spending. A lot of times you get a blue wave, don’t know if that’s going to happen, but if we do get it, we know that corporate taxes are going to be increased. They’re going to go from 21% to 28%. That’ll have an impact on corporate earnings going forward. We estimate approximately around 10%, and for individuals, they’ll see their tax rate go up as well, if you’re considered wealthy. So US$1 million or greater, your tax rate could increase to as high as 39.6% for these higher earners. Dividends and capital gains will be treated as ordinary income. That’s also at a high point of the tax rate of 39.6%. And we’ve been talking a lot about the estate and gift tax exemption. It’s currently about US$11.56 million per individual. We think under a blue wave that will go down, potentially as low as five (million), maybe even US$3 million.

Katie Klingensmith: So a lot of potential implications if we do get a very convincing change in the electoral landscape, but otherwise it’s harder to know how those different variables could be affected.

Gene Todd: That’s right.

Katie Klingensmith: Well, I want to begin to wrap up this conversation and give a final word, before a few highlights, but final word to Stephen Dover about what you’re really looking for as we go through these next two, three weeks of conversations with many of your illustrious peers, giving those insights, I’m hearing some real themes from both of you around how it’s important to understand the sources of uncertainty, but also understand on what we do know what may or may not change as a result of, of the election. What would be just your overall framework for how people should be thinking about going into tomorrow and investing over, over, especially over the next couple of weeks?

Stephen Dover: Well, I wouldn’t make any big decisions investing over the next couple of weeks. What, what I’m excited about over the next couple of weeks is that there’s a wide range of investment opportunities that we’re going to explore, from real estate, the hedge funds, and of course, equity and fixed income. But really that’s part of building a portfolio for a long period of time, and I think all of those are going to have different opportunities. A blue wave is just a different structure of the economy that will produce a lot of different opportunities that we’ll be looking at it in a different way than we have over the last four years. But I would just keep listening for the opportunities that we look at in all sorts of different asset classes. To me, it’s a very exciting time, not a time necessarily that we need to be particularly worried. And, I’m excited to see the election results as they roll out. But we have a lot of big things going on—as Gene previously mentioned—in Asia and Europe and all around the world and all the different asset classes. So, we hope to just become more educated over the course of the next couple of weeks.

Katie Klingensmith: Yeah, I think that’d be really exciting, Stephen. And I look forward to listening to you talk to those folks. For tomorrow, we can look forward to Stephen speaking with our CIO of fixed income, Dr. Sonal Desai, and also her guest Jonathan Rothwell from Gallup. And we’ve been doing some joint polls, again, really looking, not just at political views, but the economic implications, certain factors that have an impact for investors. So, Stephen will have the privilege of speaking to both Jonathan Rockwell and Dr. Sonal Desai tomorrow. As I mentioned at the beginning, we’ll be doing this every day, come here at the same time or, or find this content easily, really any place on our website. It will also be in written form afterwards. We’re excited to be able to host this conversation. I would like to thank Gene Todd, that who is the head of client development at Fiduciary Trust International and Stephen Dover, the host of this series and the Head of Equities at Franklin Templeton. Thank you both.

Stephen Dover: Thank you, Katie.

Gene Todd: Thank you. Good to be with you.

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