Governmental Policy and Markets

November 20, 2020

By Tim Courtney, Chief Investment Officer

As of today, it looks like we will have a divided government in 2021 if Republicans win at least one of the Georgia runoff elections.1 Under a divided government, we believe the more ambitious policy and tax law changes are unlikely.2 Markets will begin to factor in more likely changes as the policy and regulatory environment becomes clearer.

Rather than speculating about how governmental actions might affect values, we believe most investors are better off maintaining well-diversified portfolios. This is because while some policies will have clear market impacts, others have less clear and potentially unintended consequences.

For example, if corporate tax rates were to change, we could pretty easily foresee how that would affect company earnings based on their income and structure, and market prices would need to adjust to reflect this. On the other hand, the impact of tariffs resulting from the trade war with China has been much harder to predict. One of the goals of the tariffs was to provide some help to smaller U.S. companies.3 However, it is difficult to determine what benefit these companies ultimately gained from the tariffs as they underperformed, both before and during the second-quarter lockdowns.4

Sometimes if speculators are right about a policy and its effects, they still may not be able to profit from it. There has been great interest in the renewable energy sector in anticipation of greater green policies and regulation.5 Over the last several quarters, many clean energy funds and companies have already seen large inflows forcing prices much higher, meaning even if policies line up to favor these companies their future expected returns are much smaller.5

In addition, corporate policies will also have effects on markets. One issue we are reviewing and discussing is the potential move by several large asset managers to employ a unified Environmental, Social and Governmental (ESG) methodology in their investment decision-making process. If enacted, this change could greatly alter capital costs and market dynamics.

None of this is to deny that governmental policies and regulations can alter valuations and create winners and losers. It is only to note that it is difficult to profit by constantly arranging portfolios to fit changing policies that may be offset by other variables. We will continue to watch for changes affecting markets with a goal of investing in productive companies around the world.

Sources:
1. CNBC.com (11/13/20) – Second Georgia Senate race will go to a runoff, setting up showdown for Senate control
2. Fortune (11/16/20) – Biden’s corporate tax plan depends on Georgia’s Senate results
3. CNBC.com (5/9/20) – Here’s what small businesses, slammed by China tariffs, are doing to minimize the impact of the trade war
4. Forbes (8/7/20) – Study finds small business revenues dropped 52% and payrolls declined 54% due to COVID pandemic
5. U.S. News & World Report (11/18/20) – Green is the new black in boom for clean energy funds

PAST PERFORMANCE IS NOT AN INDICATION OF FUTURE RETURNS. Information and opinions provided herein reflect the views of the author as of the publication date of this informational piece. Such views and opinions are subject to change at any point and without notice. Some of the information provided herein was obtained from third-party sources believed to be reliable but such information is not guaranteed to be accurate. In addition, the links provided within are for convenience only and the provision of the links does not imply any sponsorship, endorsement, or approval of any of the content. We do not guarantee the content or its accuracy and completeness. The content is being provided for informational purposes only, and nothing within is, or is intended to constitute, investment, tax, or legal advice or a recommendation to buy or sell any types of securities or investments. The author has not taken into account the investment objectives, financial situation, or particular needs of any individual investor. Any forward-looking statements or forecasts are based on assumptions only, and actual results are expected to vary from any such statements or forecasts. No reliance should be placed on any such statements or forecasts when making any investment decision. Any assumptions and projections displayed are estimates, hypothetical in nature, and meant to serve solely as a guideline. No investment decision should be made based solely on any information provided herein and the author is not responsible for the consequences of any decisions or actions taken as a result of information being provided herein. There is a risk of loss from an investment in securities, including the risk of total loss of principal, which an investor will need to be prepared to bear. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment will be profitable or suitable for a particular investor’s financial situation or risk tolerance. Exencial Wealth Advisors, LLC (“EWA”) is an investment adviser registered with the Securities & Exchange Commission (SEC). However, such registration does not imply a certain level of skill or training and no inference to the contrary should be made. EWA may only transact business in those states in which it is registered, notice filed, or qualifies for an exemption or exclusion from registration or notice filing requirements. Complete information about our services and fees is contained in our Form ADV Part 2A (Disclosure Brochure), a copy of which can be obtained at www.adviserinfo.sec.gov or by calling us at 888-478-1971

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