November 2020 - Post Election Exhale

By Kyle M. McBurney, CFP

Posted on Nov 12, 2020

As I write this, we are on “Election Day Four,” and I have lost track of time. This is about as close as we may all get to a real-life Bill Murray Groundhog Day. While the outcome is yet to be called, things are becoming more and more evident with each measured (and painfully slow) ballot dump. Seriously, what is Nevada doing over there?? It’s as if all ballots were sent to the DMV.

First of all, let us all take a moment to collectively exhale. It has been quite a week thus far. However, we should be proud of what has transpired. Always good to remind ourselves of the bright side. Tuesday was smooth and peaceful, a reminder of our great shared American tradition. With 145 million votes counted and more yet to be processed, this election absolutely obliterates past election turnouts, and it ain’t even close. We should all be proud, candidate aside. Complacency is a poison to any well-functioning democracy. Anyone out there feeling complacent? Didn’t think so.

As always, we will do our very best to remain as politically agnostic as possible. This newsletter’s chosen lens is market-focused, and our attention lives within the white lines of the economic and stock market playing field. Wish us well as we navigate society’s current third rail.

Likely Scenario: Biden Win and Republican Senate (Divided Government)

To be clear – markets love divided governments. Since Monday, the S&P 500 has ripped 6% higher with small-cap stocks a tic behind rallying 5.5%. Even better, markets have been led by “risk-on” sectors such as industrials, technology, and consumer discretionary. Healthcare stocks have also had a fantastic week (a sector we have been particularly bullish on within client portfolios). We believe that the market’s post-election reaction to what we know so far about the outcome is both astute and eminently rational.

While it may sound counterintuitive, markets appreciate a government that, to put it nicely, is unable to enact anything too economically stupid. Markets love gridlock – think Interstate 93 before the pandemic. The odds of a major legislative overhaul, tax hike included, have dramatically decreased with Republicans being able to hold the Senate (Georgia still pending, of course). Thus, companies can plan and operate with the status quo in mind with little concern of a Kershaw-sized political curveball.

Now, there are some sample size issues here, but the below chart is very striking. Markets are not partisan, and neither is your portfolio.

What changes with a Biden Presidency?

There is an old Washington DC adage that personnel is policy.

So, what changes with Scranton Joe sitting behind the resolute desk?

While the election outcome is bullish overall, it is reasonable to expect some speed bumps in the short term. First of all, this scenario likely pushes fiscal stimulus into 2021 with more uncertainty over the timing, size, and scope of any potential package. This can change, of course, but there is much still up in the air. Our country is desperate for another round of relief and income replacement. More on this later.

If this week’s market activity was any indication, some assumed positives exist around a Biden win. In our view, investors will likely see the benefits of loosened international trade policies and a stimulative weaker dollar now that a large-scale tax hike is unlikely to be enacted in the short term. From a policy and sector basis, there are some modest adjustments. This outcome is bullish for the healthcare + tech sector, companies affected by trade, and companies impacted by potential tax increases, especially small-cap companies with high corporate tax rates.

Of course, we need to consider how COVID-19 fits into all this. Before this election, our team put together a “COVID-On” (Biden) and “COVID-Off” (Trump) portfolio – “COVID-On” representing more restrictions, precautions, and potential Europe-lite shutdowns. Within our “COVID-On” allocations, our team focused on some of the same themes that have thrived in 2020 throughout this pandemic – large companies over small, growth over value, with technology stocks still leading markets higher. Of course, your portfolio is already positioned this way. And a good thing too, as these tilts have been very beneficial to this year’s total return.

Our Current Focus

This will be in all caps to stress the importance – FISCAL STIMULUS.

As we close out the roller coaster of 2020, expect markets to ebb and flow around fiscal stimulus and its perceived progress.

An economic booster shot is vital to maintain our economic recovery and corresponding stock market rally. Lost in all the election noise is a resurgence in reported COVID-19 cases. Regrettably, the US just set a staggering daily record with over 120,000 new cases. The virus is as prevalent as ever. While our country is more used to dealing with the pandemic, this increase in cases will undoubtedly have economic consequences as more cases equate to a slower reopening, among a litany of other significant concerns. Take a peek at many countries in Europe, which, beset by an autumn wave of COVID-19, are turning to mass testing and forced lockdowns to contain the spread.

One question we often receive is why there is a disconnect between a rallying stock market in concert with a devastated economy and 10.1 million lost jobs.  The key point is that we have endured an economic recession, but not an income recession – this is a critical concept to keep in mind. Discretionary income, in part arising from Congress’s relief package, dramatically increased during the pandemic. This extra liquidity pushed markets upwards and helped to stave off foreclosures and economic catastrophe. This kind of liquidity lifts all boats higher and absolves many other economic sins.

Take a look at the below chart representing U.S. Disposable Personal Income –

Source: Strategas

Two things jump out:

1)      The unprecedented increase in disposable income

2)      The steady decline that is unlikely to change course without additional relief

This pandemic will continue its nasty existence into 2021; that much is clear. While optimism around a vaccine is rising (see today’s market reaction), it will likely be Q2 before it is widely available to those interested. With this in mind, it is clear that we need an economic and income bridge to help support those in need. We are at war, and our economic response should reflect that. Without it, corporate earnings and markets will likely take a significant hit.

Of course, ringing up such a significant deficit will indeed have consequences, both intended and unintended. Inflation is one major concern. However, inflation remains subdued for now, and history tells you that inflation tends to remain tamed with unemployment at such high levels.

Economists and PhDs will pontificate about the long-term effects of our stimulative actions. Only time will tell, but we believe it would be imprudent to fret about this now. In the words of Mark Twain, “I am an old man and have known a great many troubles, but most of them never happened.”

Allocation Update

How about another Mark Twain quote? Too cheesy? Either way, he proved himself a competent market prognosticator when he stated, “history doesn’t repeat itself, but it often rhymes.”

With history as our guide, we did well to raise a little cash in mid-September - as markets experienced a modest pullback leading up to the election day week. Keep in mind, the cash raise was made with an eye on offense. History once again tells us that markets tend to rally following election outcomes. And while official declarations have not been made, this week’s rally reflects a market confident in the result.

On Wednesday, our investment strategy committee agreed to redeploy the excess cash back into equities – predominately into large-cap growth stocks.

With this shift, we now rest equal weight equities versus the benchmark. While we are cautiously encouraged by a divided government and prospects of stimulus, we have to be hyper-conscious of the uncertainty around COVID-19, and all that entails. Plenty of ambiguity still remains around vaccine development and deployment. We also cannot ignore stock market valuations that are historically stretched. We will, of course, keep you aware of any changes made.

And now to the fun part. As is tradition, I typically close my newsletters with family updates or a light anecdote. While a profound wisecrack currently escapes me, I will say that the family is doing exceptionally well. Our little Teddy starts school soon and has discovered the joys of our little trolley line here in Milton. This afternoon, in fact, we spend a couple of hours watching the trolleys go by. A simple-minded activity, but welcome after this week’s adult-oriented election craziness.

Our lines of communication are always open. Calendar year 2020 is far from over. It strains gullibility to think that a year filled with surprises will stop providing them now.

I hope that this newsletter can serve as a starting point for debate and deliberation. As always, I welcome any and all thoughts and criticisms. These conversations are the ones that I genuinely enjoy.

Sanitized cheers to all,

Kyle M. McBurney,CFP®

Managing Partner

The opinions expressed herein are those of Kyle McBurney, CFP as of the date of writing and are subject to change. This commentary is brought to you courtesy of Highland Peak Wealth which offers securities and investment advisory services through registered representatives of MML Investors Services, LLC (Member FINRA, Member SIPC). Past performance is not indicative of future performance. Information presented herein is meant for informational purposes only and should not be construed as specific tax, legal, or investment advice. Although the information has been gathered from sources believed to be reliable, it is not guaranteed. Please note that individual situations can vary, therefore, the information should only be relied upon when coordinated with individual professional advice. This material may contain forward looking statements that are subject to certain risks and uncertainties. Actual results, performance, or achievements may differ materially from those expressed or implied. Referenced indexes, such as the S&P 500, are unmanaged and their performance reflects the reinvestment of dividends and interest. Individuals cannot invest directly in an index.