The year was 1787. At the Constitutional Convention, Benjamin Franklin walked out of Independence Hall and someone shouted: “Well, Doctor, what have we got? A republic or a monarchy?” To this, Franklin reportedly replied: “A republic, if you can keep it.”
Threatened by the rise of populism, the effects of a pandemic and the results of the U.S. election, 2020 has certainly tested the fortitude of the republic. We are in the midst of a generational change that will impact the global economy and the way in which investors should position their portfolios for years to come.
A confluence of near-term challenges remain. While significant progress has been made in combatting the pandemic, once a vaccine is approved, how long will it take until most of the world’s population can receive the anticipated two doses? As economies slowly open, what will be the effects of the Federal Reserve’s change in policy stance, not seen since 1951, with its desire to get credit into Main Street and create inflation? Especially curious is that, despite mainstream media’s declaration, the U.S. presidential election result still remains contested. The next president will not be definitively known until at least January 6, 2021. What if President Trump continues to occupy the White House?
Many drivers favour equity markets over the longer term — a 2021 year-end target of 4,500 for the S&P 500 is not out of the question. Until January 6, we see the prospect for a highly volatile market, with range-bound estimates for the S&P 500 between 3,200 and 3,700.
U.S. Election: Over, But Perhaps Not Over Just Yet?
Though a Biden presidency has been acknowledged, under the U.S. Constitution, the “electoral college,” a group of 538 electors, determines who becomes the U.S. president and not the popular vote. Elections are run by state, with each having a number of electors that form the electoral college. By December 8, under U.S. Federal law, each state must resolve any election disputes with their electoral college vote. At the time of writing, the outcomes of six states still remain unresolved. If, by December 14, the electoral college cannot determine the winner of the election, the Speaker of the House will oversee a “contingent election” on January 6, 2021. In this election, each state will get only one vote and that vote will be determined by the party that has the majority of representatives in congress. If this were to happen, President Trump would win the vote: 28 to 22.
History Repeats Itself?
The U.S. is no stranger to contested elections. On July 11, 1804, Alexander Hamilton and Aaron Burr met on the dueling grounds of Weehawken, New Jersey. When the duel was over, Hamilton would be mortally wounded and Burr would be wanted for murder. This tragedy was the culmination of events that began in 1801, when Burr and Thomas Jefferson tied in an electoral college vote for the fourth U.S. presidency. In short, the process went to a contingent election and in that vote Hamilton was the driving influence behind Thomas Jefferson’s victory as president. Act II of the smash hit Broadway play Hamilton chronicles this critical event in American history.
Fast forward to today and we are reminded that contested elections are not just a lesson in history. Recall the Bush vs. Gore presidential election of 2000. When members of the Florida legislature threatened to abandon the results of the statewide popular vote and appoint electors for a particular candidate, the U.S. Supreme Court appeared to endorse their power to do so: “The individual citizen has no federal constitutional right to vote for Electors for the President of the United States.” Democracy sometimes masquerades under the mask of the republic. History often has a way of rhyming.
An Early Look at 2021
Should election results be upheld as presupposed, it will be a declaration of the rejection of statism by the U.S. population. As the Senate maintains Republican power, Washington DC will be in grid lock — the sweet spot investors love. Under a Biden-“light” presidency, it is unlikely that policies that push the economy towards a socialist agenda will be implemented: no significant regulation tightening, no substantial tax hikes and possibly a smaller pandemic stimulus package. We would expect a reduction in global trade tensions and rhetoric and a marginally more market-friendly immigration policy. Through executive order policies, we anticipate that Biden would implement more green-friendly mandates. We will likely see a continuation of the Federal Reserve’s pivot during Trump’s tenure: keeping interest rates low, pushing for greater inflation and working with the Treasury to target fiscal policy programs. With science driving success in a Covid-19 vaccine, and as economies slowly open, risk assets should see appreciation. To wit, as long as the U.S. does not implement policies that are not capital or shareholder friendly, we see a target of 4,500 for the S&P 500 by year-end 2021.
If President Trump does pull off the unexpected, expect a short, sharp correction. However, a second term will likely bring positive reaction by the markets with one caveat: possible retribution against big tech companies.
To be clear, we don’t see the global economy going back to the so-called normal that existed pre-Covid-19. As with any major crisis throughout history, the evolutionary forces released by the pandemic will not be reversed. Furthermore, it is too early to posit what the new, post-Covid-19 normal will look like. The emergent evolution is apparent: the world will continue its digital transformation, millennials will be a dominant force in driving consumer behavior and social norms, deglobalization of the world economy will persist, and China and the U.S. will compete for global technological superiority.
Where to for Investors?
In 2020, we continue to recommend a barbell approach to constructing investor portfolios. In 2021, as political tensions decline and if science does, in fact, manufacture the silver bullet vaccine to allow economies to fully open, we suggest that investors may want to value-tilt their portfolios. Value stocks may play catch up in 2021. This is not to say leading technology stocks won’t have a good year; they should, but there’s a good possibility that value may have an even better year.
Are there risks? As in every year, a 10% correction should be expected. If, for whatever reason, economic policies divert towards a more socialist path or increase geopolitical tensions with China, our base case thesis would be reconsidered. Also plausible is the threat that has been looming for years: the possibility of the U.S. administration taking a hard stance against big tech, a sector that has enjoyed many years of tax breaks. Of course, investing success is based on keeping objective and flexible, as change is always imminent.
Alas, with weeks still remaining to the end of this challenging year, until political uncertainty is pacified investors should expect volatility. Could President Trump have his “Perry Mason” moment? As we have seen in 2020: anything is possible. However, beyond the gates of 2020, we are all deserving of a better year and 2021 is one that looks to be promising for investors.
James E. Thorne, Ph.D.
