Don't Fear the Election Results
With the close of the third quarter, we are that much closer to being done with 2020. It is hard to believe we’re now in the fourth quarter. Where has this year gone? Before you know it, Thanksgiving will be here, and don’t even get me started on Christmas sales beginning sometime this month! For the year, the S&P 500 is slightly positive, while the Dow Jones Industrial Average is slightly negative. Considering where we closed the end of the first quarter, I’d say we’ve come a long way. Traditionally, the fourth quarter is filled with holidays, family, and an optimism that buoys the markets into the close of the year. However, with the election one month away, and nerves already a bit frayed, I suspect the uncertainty ahead will be a fitting end to this extraordinary year.
To a large extent, the increase in the markets this week can be attributed to end-of-quarter fund and index rebalancing and to a smaller degree, hopes for another round of federal stimulus. Speaker of the House Nancy Pelosi met with Treasury Secretary Steven Mnuchin to try and kickstart negotiations this week. While I remain hopeful, it is unlikely they reach an agreement before the election. To be honest, there isn’t an incentive for it to happen sooner. The winning party this coming November will be in a position to claim victory by putting forward the next round of stimulus and in doing so, will receive the credit.
On the subject of the economy, the numbers are holding steady although not improving markedly in recent weeks. Today, the jobs report noted initial jobless claims of 837,000, which was better than analysts’ estimates but still represents a lot of newly unemployed. In fact, we might see this number increase in coming weeks with the airlines almost assuredly planning on large layoffs. Much of the hospitality, resort, entertainment, leisure, and travel industries are on the verge of throwing in the towel on 2020. Airlines are in a particularly difficult spot with business travel down 60% over last year and personal travel all but dead. While federal stimulus would help these industries, there is beginning to be pushback, much like during financial crisis.
Before you start to think I’m being pessimistic, I am not. Despite the pandemic, the best companies continue to find ways to not just tread water but gain market share. Whether through digital initiatives like e-commerce or curbside pickup or efficient use of capital, there are companies finding new ways to attract customers and conduct business. For many of these companies, embracing technology is part of the solution. For others, it involves rethinking the business model, or perhaps moving in a different direction, i.e. BP, Eni, and Total (see last week’s email). Those companies that are in a position to rethink not only how they do things but more importantly what they do, are going to be the winners. Some industries like airlines, gas & oil producers, and cruise lines to name a few, don’t have as much flexibility. But even within these industries, rethinking the business model could mean the difference between a slow decline and a transformation to something better.
In closing, I turn to Goldman Sachs which has a new message out this week. In its note, it states don’t fear the election results. According to its research, a GOP sweep or a split Senate/Presidential result are largely seen as supportive of the current direction of the market. Relying on historical data and the Biden platform, the firm notes that a Democratic sweep would likely have only a modest net impact on the trajectory of S&P 500 profits. Goldman’s political economists believe only a “pared-down version” of Biden’s tax plan would eventually become law and that it would be phased in starting in 2022. In a nod to Keynesians, Biden’s proposed fiscal expansion of $5.4T in new spending is predicted to offset the negative impact of taxing the wealthiest tax brackets. While we may individually feel the impact of such progressive measures, the economy as a whole should continue on its current upward trajectory. Now you know.
Bruce J. Mason, MBA