The US election has passed without any big surprises. In Our US Election Markets in Motion: Part 1, our October 28 Webinar, and our recent Short-term Outlook, we favored three election outcomes:

1. Joe Biden is the favorite to be the next president and we believe there will be a resolution within a fewdays.
   – Joe Biden was projected to win by major media outlets just days after the election. Trump has not officially conceded, but there is no path to victory – there aren’t enough outstanding votes for him to move past Biden, recounts won’t flip enough states (if any), and there’s no evidence of significant fraud.
2. We discounted a “blue wave” with republicans likely to maintain control of the Senate.
   – Republicans are likely to maintain control of the Senate. With a 50 to 48 advantage after Super Tuesday, two runoff elections in Georgia will decide a majority in the senate, where Republicans are favored in both elections.
3. This scenario will be short-term bullish for risk assets – in our view, simply clearing the event risk off the table by getting past the election was itself a key upside catalyst for risk assets. (chart 1).
   – Risk assets have rallied sharply since election day – the S&P 500 is up ~9%

So, what are investment implications moving forward?

We believe a Biden presidency and GOP senate are good for risk markets. Markets like predictable trade policy and a divided congress. This reduces the odds of tax hikes or new regulations and is a relief to investors expecting a less business-friendly environment. In fact, there’s historical precedence of better equity performance during times of gridlock (chart 2).

However, for the same reasons checks and balances are positive for markets, such a balance of power poses risks to the near-term path of fiscal stimulus. Nevertheless, we are optimistic a targeted package still gets done for several reasons: 1) the economy needs it, 2) borrowing rates are at historic lows, and 3) public opinion demands fiscal relief (chart 3).

Most important to this favorable backdrop, we expect monetary policy will continue to be accommodative.

A Shot in the Arm

Encouraging news has developed on the vaccine front. Both Pfizer and Moderna announced their Covid-19 trials immunized more than 95% of participants! Both vaccines take a similar approach by leveraging messenger RNA technology – which helps validate our optimism. The results are preliminary, but both companies are expected to seek emergency use authorization from the FDA and if all goes well, start distributing doses by the end of the year with the potential of inoculating the entire US population by mid-2021. While there are still hurdles, ten other vaccines are in late stage trials, and it is now widely expected a safe and effective vaccine will become available by Q1 2021!

This news paves the way for a rapid rebound in economic activity next year but the path to ending the pandemic is likely to be a bumpy one. There’s a duration mismatch between the current resurgence of Covid-19 (record cases & hospitalizations) and the successful rollout of a vaccine. This will weigh on economic growth in the near-term and reduces the odds of a disorderly rise in bond yields that could sink the stock market. Therefore, we expect that T.I.N.A will continue to dominate investor behavior into year-end.

With this month’s moves, we exited our hedge in long-dated treasury bonds. Bond yields have established a floor and no longer provide the same diversification. We increased risk exposure by adding to our positions in large-cap growth stocks and short-term high yield bonds. We maintain an agile position in short-term bonds and cash in order to take advantage of any pullbacks in risk that are not related to fundamental areas of real concern.

Finally, know that all our Strategies will adapt to fundamental or rules – based, not emotional influences. We seek opportunities for solid risk adjusted returns and to preserve capital in asset market downturns.

Recent Portfolio Changes

We exited our position in long-term Treasuries. Nominal yields have modestly risen; we expect this will continue post-election and into next year.

We added to our position in Large Cap Growth equities. We expect that growth stocks should continue to outperform in an environment of weak economic growth and lower-for-longer interest rates.

We added to our position in High Yield. We believe that High Yield is an attractive asset class that increases the overall risk exposure and yield of the portfolio.

¹ Information as of 11/12/2020. Individual account allocations may differ slightly from model allocations

² Contains international exposure

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