Investment Insight |
Trumped four more years?
It is hard to believe that it has been four years since Donald Trump was elected President of the United States. This election season has certainly been unique, occurring in a year that has been characterised by a global pandemic, a short but deep recession and continued social unrest.
Yet the surprises keep coming. The events of the past few weeks include a new Supreme Court Justice, a combative first presidential debate and President Trump contracting COVID-19 — adding to the uncertainty.
We have received an increasing number of questions around how to interpret and follow results from the upcoming election day on 3 November (4 November NZ time). Below, we outline our high-level framework for how events might unfold and more importantly, how clients’ portfolios are positioned.
For those who love politics, read on. For those who do not, feel free to skip to our concluding remarks on Portfolio positioning as whoever wins, it does not change our investment approach. After all, we are investing not just for ‘four more years’ but for many more.
Once polling booths close
Some states will take longer than normal to fully count results due to early voting. Furthermore, initial results will be difficult to assess as there are extreme differences in the number of people who used early voting between Democrats and Republicans.
However, early results from states that can provide complete results quickly can still provide actionable insights on the election and will be key to how events unfold and what the market reaction could be – in the short term – well before TV networks call a winner.
The road to knowing a result likely goes through Florida and North Carolina. 65% of Florida mail in ballots have been returned, so have 56% of North Carolina ballots. And both states can already count those votes and have stated publicly those counts will be quickly released upon poll closing. So both states could return quick results and this opens up the possibility of knowing the election outcome early in the night.
The Sunshine State
Florida seems to us to be crucial for Trump’s re-election effort. We think it is quite possible that should Florida be declared early on election night for Joe Biden it will materially reduce the chances of President Trump’s re-election
Should Florida either be extremely close or called for Trump, we expect a lengthy drawn out process in determining the winner of what we think will then be a very close election.
Tar Heel – The Old North State
In the Senate, pundits will be closely following the race in North Carolina. With a current 53-47 balance in favour of the Republicans, the Democrats will need to flip four current Republican incumbents. North Carolina will be very important to that effort and again is an early vote counter.
The result could take time – the Keystone State
Pennsylvania is arguably the most important swing state this election as it is currently the likeliest ‘tipping-point state’ or the state that could determine the winner of the Electoral College, according to poll aggregation website FiveThirtyEight.
About two million mail-in ballots have already been returned so far in Pennsylvania, but because the state can’t begin processing mail ballots until Election Day, State officials have said that it could take three days to finish counting. Biden supporters are far more likely to vote early or absentee than Trump supporters, who are far more likely to vote on Election Day. So between Tuesday and Friday, there could be a big shift in terms of which party is favoured in the vote tally
In other words, we will need to prepare ourselves for a ‘blue shift’ in states like Pennsylvania. States that primarily report Election Day results first could show Republicans with an initial lead, then shift toward the Democrats as more mail ballots are counted. Of course, this won’t be true everywhere. Some states, like Florida, are already counting early votes.
Waiting and watching
In our view, the market is already pricing in a relatively high probability of a Biden victory which should lead to an initial jump in shares due to the promise of more stimulus. In the event of a contested outcome, where we do not know the winner for weeks or longer, markets may become more volatile. Eventually, though, we will have a winner, uncertainty will fall, and normal election and inaugural-year market drivers should kick in.
Portfolio positioning
With so much uncertainty, it is unsurprising that many clients are asking whether their portfolios are properly positioned for the outcome. As we learned from the 2016 presidential race, it can be difficult to predict a winner.
History tells us that the outcome will not have a significant impact on stock market performance. You are better to stick with your long-term investment strategy and avoid making emotional decisions based on who you think may win the White House.
The recent volatility is typical of the market’s behaviour following an all-time high. We view the past few months as a healthy consolidation of the initial leg of a bull market that is likely to run for years, not months. Any share market weakness from the election or otherwise we believe would be an opportunity to invest.
Yet the surprises keep coming. The events of the past few weeks include a new Supreme Court Justice, a combative first presidential debate and President Trump contracting COVID-19 — adding to the uncertainty.
We have received an increasing number of questions around how to interpret and follow results from the upcoming election day on 3 November (4 November NZ time). Below, we outline our high-level framework for how events might unfold and more importantly, how clients’ portfolios are positioned.
For those who love politics, read on. For those who do not, feel free to skip to our concluding remarks on Portfolio positioning as whoever wins, it does not change our investment approach. After all, we are investing not just for ‘four more years’ but for many more.
Once polling booths close
Some states will take longer than normal to fully count results due to early voting. Furthermore, initial results will be difficult to assess as there are extreme differences in the number of people who used early voting between Democrats and Republicans.
However, early results from states that can provide complete results quickly can still provide actionable insights on the election and will be key to how events unfold and what the market reaction could be – in the short term – well before TV networks call a winner.
The road to knowing a result likely goes through Florida and North Carolina. 65% of Florida mail in ballots have been returned, so have 56% of North Carolina ballots. And both states can already count those votes and have stated publicly those counts will be quickly released upon poll closing. So both states could return quick results and this opens up the possibility of knowing the election outcome early in the night.
The Sunshine State
Florida seems to us to be crucial for Trump’s re-election effort. We think it is quite possible that should Florida be declared early on election night for Joe Biden it will materially reduce the chances of President Trump’s re-election
Should Florida either be extremely close or called for Trump, we expect a lengthy drawn out process in determining the winner of what we think will then be a very close election.
Tar Heel – The Old North State
In the Senate, pundits will be closely following the race in North Carolina. With a current 53-47 balance in favour of the Republicans, the Democrats will need to flip four current Republican incumbents. North Carolina will be very important to that effort and again is an early vote counter.
The result could take time – the Keystone State
Pennsylvania is arguably the most important swing state this election as it is currently the likeliest ‘tipping-point state’ or the state that could determine the winner of the Electoral College, according to poll aggregation website FiveThirtyEight.
About two million mail-in ballots have already been returned so far in Pennsylvania, but because the state can’t begin processing mail ballots until Election Day, State officials have said that it could take three days to finish counting. Biden supporters are far more likely to vote early or absentee than Trump supporters, who are far more likely to vote on Election Day. So between Tuesday and Friday, there could be a big shift in terms of which party is favoured in the vote tally
In other words, we will need to prepare ourselves for a ‘blue shift’ in states like Pennsylvania. States that primarily report Election Day results first could show Republicans with an initial lead, then shift toward the Democrats as more mail ballots are counted. Of course, this won’t be true everywhere. Some states, like Florida, are already counting early votes.
Waiting and watching
In our view, the market is already pricing in a relatively high probability of a Biden victory which should lead to an initial jump in shares due to the promise of more stimulus. In the event of a contested outcome, where we do not know the winner for weeks or longer, markets may become more volatile. Eventually, though, we will have a winner, uncertainty will fall, and normal election and inaugural-year market drivers should kick in.
Portfolio positioning
With so much uncertainty, it is unsurprising that many clients are asking whether their portfolios are properly positioned for the outcome. As we learned from the 2016 presidential race, it can be difficult to predict a winner.
History tells us that the outcome will not have a significant impact on stock market performance. You are better to stick with your long-term investment strategy and avoid making emotional decisions based on who you think may win the White House.
The recent volatility is typical of the market’s behaviour following an all-time high. We view the past few months as a healthy consolidation of the initial leg of a bull market that is likely to run for years, not months. Any share market weakness from the election or otherwise we believe would be an opportunity to invest.
Source: FiveThirtyEight
For more information please contact NZ Funds.
This document has been provided for information purposes only. The content of this document is not intended as a substitute for specific professional advice on investments, financial planning or any other matter.
While the information provided in this document is stated accurately to the best of our knowledge and belief, New Zealand Funds Management Limited, its directors, employees and related parties accept no liability or responsibility for any loss, damage, claim or expense suffered or incurred by any party as a result of reliance on the information provided and opinions expressed except as required by law.
For more information please contact NZ Funds.
This document has been provided for information purposes only. The content of this document is not intended as a substitute for specific professional advice on investments, financial planning or any other matter.
While the information provided in this document is stated accurately to the best of our knowledge and belief, New Zealand Funds Management Limited, its directors, employees and related parties accept no liability or responsibility for any loss, damage, claim or expense suffered or incurred by any party as a result of reliance on the information provided and opinions expressed except as required by law.
***
James Grigor is Chief Investment Officer for New Zealand Funds Management Limited (NZ Funds) and a member of the NZ Funds KiwiSaver Scheme. James' comments are of a general nature, and he is not responsible for any loss that any reader may suffer from following it.
***
