By Tim Courtney, Chief Investment Officer
*Note, this article was written on November 6, 2020 at 12:00 CT.
While many Americans, with feelings of unease over the election outcomes, have been glued to the edge of their seats the market has shown little sign of distress at the prospect of a divided government.1
As of now, most expect that former Vice President Joe Biden will win the presidential race and the Republican party will retain control of the United States Senate, though results are not final and some races will require runoffs.2 Below are our observations thus far based on this outcome.
Taxes: Although Biden has been vocal about his goals to reform tax legislation – particularly as it relates to corporate taxes, capital gains and step-up rules – the odds of these being implemented are low assuming the Republican majority is maintained in the Senate.3 The odds are also very low for any retroactively applied tax increases. As such, we don’t see a need for certain clients that would have been affected by some of these changes to make portfolio repositionings over the next several months.
Markets: The markets have been reacting to the election news, with returns broadly positive for the week.1 The markets are factoring in the increased likelihood of another government stimulus package but one that is smaller than what Democrats may have favored.4 A potentially smaller stimulus caused growth and tech companies to surge on Wednesday as these companies are less dependent on stimulus to weather the virus’ effects on the economy.5 The U.S. dollar, which often rises in times of greater market stress, is down about 2%, dropping alongside expected volatility this week.6
Interest rates: Interest rates have moved all over following the election, with the benchmark 10-year treasury yield having shot up above 0.90% the night of the election only to fall back to 0.72% and then rise to 0.82% as of Friday, November 6.7 Mortgage rates have followed suit, once again setting a record low with the 30-year fixed rate averaging 2.78% for the week ending November 5, 2020.8 Part of these moves has been a reaction to expected national spending and debt levels for the next few years. The higher the expected spending, the higher the rates.
While the outcome is not certain, we do not believe any actions are needed before year-end to address potential tax law changes. Markets currently appear to be priced assuming a divided government, and volatility/fear measures have fallen precipitously from pre-election levels. We are monitoring developments and will send updates as the situation becomes clearer. If you have any questions or concerns about your financial plan, please contact your advisor.
Sources:
1. Yahoo! Finance (data as of 11/5/20) – S&P 500
2. CNBC (11/5/20) – Election 2020 results: Michigan and Wisconsin called for Biden as Trump begins legal battles
3. Tax Foundation (10/22/20) – Details and analysis of Democratic presidential nominee Joe Biden’s tax plan (10/22/20)
4. CNBC (11/5/20) – With election nearing a resolution, investors see some market-friendly themes emerging
5. Business Insider – (11/4/20) US tech stocks surge in volatile rally after Trump says he won the election, while the dollar’s gains start to fade
6. MarketWatch (data as of 11/6/20) – U.S. Dollar Index (DXY)
7. MarketWatch (data as of 11/6/20) – U.S. 10 Year Treasury Note
8. MarketWatch (11/5/20) – Mortgage rates fall to another record low as election outcome remains uncertain
The S&P 500® is widely regarded as the best single gauge of large-cap U.S. equities. There is over USD 9.9 trillion indexed or benchmarked to the index, with indexed assets comprising approximately USD 3.4 trillion of this total. The index includes 500 leading companies and covers approximately 80% of available market capitalization.
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