Co‐Chief Investment Strategists Emily R. Roland, CIMA, and Matthew D. Miskin, CFA, give their initial take on the U.S. election results, how the stock market is reacting, and the potential impact for the economy. Like 2016, the polls were way off, but a stock market indicator during election years hinted at a much closer presidential race. The strategists also discuss which sectors of the market and economy they see performing best over the next four years, the outlook for fiscal stimulus and U.S. Treasury yields, and why they’re doubling down on balanced portfolios with a high‐quality tilt. To learn more about how the election results may impact markets and the economy, explore our 2020 elections page: https://bit.ly/32e5wpT
John Bryson:
Hello, everyone, and welcome to the Portfolio Intelligence podcast. I'm your host, John Bryson, head of investment consulting at John Hancock Investment Management. As always, the goal of this podcast is to help investment professionals deliver better outcomes for their clients and their practice. Today is November 4, 2020, and I'm joined by Emily Roland and Matt Miskin, our co‐chief investment strategists at John Hancock Investment Management. As you may know, Emily and Matt are the architects behind our very popular quarterly capital markets outlook piece titled Market Intelligence. So it is Wednesday morning, election day plus one. Let's start with Emily. Did you get any sleep last night?
Emily Roland:
Yeah—well, it certainly was quite a busy night. I actually did go to bed at a reasonable hour as soon as I knew that we weren't going to know the results, especially in some of the key battleground states in the Midwest, I decided that a strategist needs her beauty rest and I decided to get back after it early this morning.
John Bryson:
Pretty sound strategy. I like that. Matt, how about you?
Matt:
Given 2016 was still ingrained in my mind, I did not sleep much at all. I think I got a couple hours in, but tried to start early here with Emily, looking at the markets into the open.
John Bryson:
Yep. Knowing you two, that's exactly how I expect it to play out for you, is that you'd be keeping one eye on the phone or the news screen. All right, well, let's get into it. So what happened last night? Maybe we'll start with Emily. Where do we stand on the presidential race and the Senate race?
Emily Roland:
Yeah, it's still very fluid here. We're looking at votes continuing to be counted, particularly, again, in those key swing states. One thing we do know here with certainty is that, similar to 2016, the polls were way off again, and the race is much tighter than expected. A little different from 2016, the equity markets were much more contained overnight, so we saw futures markets mostly positive overnight and certainly into the open this morning.
Emily Roland:
I think really the real news here is that the much‐hyped or anticipated blue wave has failed to materialize, so a Biden win with an all Democratic Congress. Again, nothing certain yet that the voting is not all counted. We could actually see, unfortunately, a contested part of the election play out here. We may see lawsuits start to pop up by either party as we continue to pursue these vote counts here, but it looks like right now the Democrats are very much likely to keep the House and the Republicans are likely to keep the Senate. This would, of course, result in a divided government scenario, really similar to what we've had in place before the election.
Emily Roland:
You know, we've all been a bit skeptical of the polls here. One thing that Matt and I have been watching closely is actually the market, and, in fact, the market has been a better predictor of the presidential election than the polls. And the stat goes that the S&P 500, if it ends the three‐month period leading up to the election positive, the incumbent party wins reelection. And that's been true every time since 1984 and 87% of the time back to 1928. So it was really down to the wire; in fact, a couple of days ago, it was just almost completely even going back three months; the market did end up Tuesday in positive territory. Again, this suggested to us that Republicans would win. Again, we don't know. It might not be the best indicator this time around, but something that we've been using to suggest that perhaps the race was again tighter than many of the pollsters had been predicting.
John Bryson:
Right. That certainly does seem relevant right now. Matt, Emily talked about the markets last night.
We're a couple of hours into the trading day. What are they doing today to react to what's going on?
Matt:
Yeah, so, out of the gates, few markets are higher in terms of the stock market and even the bond market. In terms of the U.S. markets here, we're seeing a bit of a rotation back into higher‐quality‐type sectors. Healthcare is one of the best performers out of the gate. Think about less regulation, pricing, amidst a divided Congress. So if the Senate is remaining Republican, as Emily pointed out, and the House goes Democrat, it's going to be hard to pass legislation there. So healthcare stocks doing well. Tech communication services also up in the morning. We're looking at less risk of higher taxes on the corporate front, given that the Senate likely stays Republican. So I think the market's pricing in that a bit.
Matt:
And then on the downside, we are seeing some of the cyclical sectors, think energy materials, likely lower on less of a prospect of a substantial fiscal bill being passed. So that stimulus catalyst continues to fade here, and we believe that the markets are gravitating a bit more to those companies that can power through with strong earnings.
Matt:
And then quickly on the bond market. The 10‐year Treasury yield really whipsawed last night, so we went to as high as 92 basis points on a 10 year last night as the voting just started to be counted. This morning we're looking at 77 basis points, so that's a pretty large drop in Treasury yields, again, likely pricing in less prospects of a fiscal stimulus bill. To us, the intermediate part of the curve continues to look attractive here. Investment‐grade corporate bonds are rallying right out of the gate. That's a good spot, in our view, to be. So it's a balance of that quality side on the equity front, and then looking at good investment‐grade corporates on the fixed‐income side leading the markets the day after the election.
John Bryson:
Okay. So, Emily, when we talk about what's going on in the markets for the last couple of months, the possibility and the size of a stimulus package has really had a lot to do with what's happening. What are your thoughts going forward on the possibility of a stimulus package?
Emily Roland:
Yeah, I mean, I think Matt just really nailed that in the discussion around cross‐asset performance, leading up to this and how it's been impacted by investors pricing in this really large fiscal stimulus bill that we would have potentially gotten under a Democratic sweep. So with yields backing up, with cyclicals reflecting this reflation trade that investors were expecting on more fiscal stimulus, that's reversed a bit. If you think about Republicans being likely to keep the Senate, a substantial stimulus bill is less likely here. We could see something like maybe $500 billion; we've seen estimates up to maybe even $1.2 trillion, but this is different than the $2 to $3 trillion stimulus bill that had been expected under the Democratic sweep.
Emily Roland:
I think one thing that is maybe a bit under‐covered here is that even though the stimulus bill will be smaller, likely, there's actually more of a chance of it happening sooner if Trump wins his second term. So it’s something that could be done in between now and the inauguration in January if Trump actually does stay in office again, likely to be a smaller package, but I do think that if you look across the geopolitical strategists that we work with, most are expecting that we do get something in 2021 regardless, but again, a much smaller size.
Emily Roland:
I think the final point on that is the Cares Act is massive. $2.6 trillion that we got back in March, and that's still being put to work today, which is one of the reasons that the economy has improved as much as it has. So fiscal stimulus is still an action now and again likely to get more, which should be supportive of equity markets.
John Bryson:
So, Emily, play out a hypothetical for me. Let's say the Congress does end up being split. How would things be different under Trump versus Biden, if that were the case?
Emily Roland:
Yeah, that's a great question. So I think that we can start by thinking about Biden under a divided Congress first—and by the way, that's sort of where the betting odds are right now—but anything could change here. The first thing to note is that would actually be very rare. Getting a new president with a Senate from another party has actually only happened twice since World War II. So, normally, the presidential race dictates what happens down the ballot, and that may not happen this time. Again, it goes back to thinking about this blue wave scenario that many forecasters had predicted that would have resulted in things like higher taxes; I think certainly investors have been focused on that. Biden had proposed raising the corporate tax rate back up to 28% and imposing more taxes on individuals as well.
Emily Roland:
He also had an agenda that was filled with ideas around changes to the Affordable Care Act. Maybe even something like a potential public option, things like massive spending on infrastructure, green energy, things to combat climate change. A good chunk of that agenda will probably be dead on arrival now if the Senate does remain under Republican hands. There are things that a Biden president could do with the divided Congress under executive action. So things like pursue more regulations, lighten up on tariffs, which I think is possible, particularly as it relates to Europe, maybe not necessarily China. We think he's likely to keep a hard line on China, but the big issues, I think, that investors were primarily concerned about what will maybe go away here.
Emily Roland:
Quickly moving to a Trump presidency with a divided Congress. Again, it's more of the same. That's where we've been over the last couple of years. Then, similarly, he would be limited to pursuing agenda items that can be done via executive action. So maybe continuing with protectionist measures, deregulation, et cetera. There was a proposal under Trump to see some further tax relief. That probably won't happen, but again, more of the same and, frankly, investors tend to like gridlock. There are fewer unknowns and that may well be either scenario that we're in for heading forward.
John Bryson:
Thanks, Emily. So, Matt, back to you just to close this out and bring it back to the markets. With this uncertainty, how should investors be thinking about the rest of this year and heading into 2021? And have any of your views in Market Intelligence changed?
Matt:
Well, we believe that the core principles of a balanced portfolio still actually, if anything, are more warranted today and will shine through into the close of this year. So the fact that the Treasury yields are finding a bit of a ceiling around 90 basis points suggest bonds won't see too much negative price action. I think the equity market has been choppy here. Not knowing if this gets contested, we wouldn't be surprised if we did see some volatility. But in 2000, when there was 36 days where we didn't even know who won the election, the market was only down 5%. So really not anything substantial there. I think you’ve got to find the right businesses that have the fundamental support to get you well positioned in 2021.
Matt:
We do think that results in a quality bias in the U.S. over non‐U.S. bias. We do want to look at mid caps and industrials as well, as the economic engine continues to improve here, regardless of the political noise that's out there. And then, again, for fixed income, I think that there's been a lot of negative sentiment around it, but at the end of the day, it's still delivering. We're looking at 2 to 3% income potential using investment‐grade corporates, a little bit of high yield, some work‐back securities, but that part of the portfolio is still delivering, and we would look opportunistically at equities amidst volatility to set up for 2021, and hopefully that's a better year all around.
John Bryson:
Amen to that. Well, listen, it's a historical time in our lives and a fluid involved with time in our lives. And we're going to need to keep people up to date with what's going on. So folks, if you don't follow them, follow Emily and Matt on Twitter, Emily @EmilyRRoland and Matt @Mathew_Miskin. And if you want to hear more, please subscribe to the Portfolio Intelligence podcast on iTunes, or visit our website for the latest updates, jhinvestments.com. Everybody have a great afternoon. We'll talk to you soon.