• Pierre Fournier

A Possible Biden Presidency: What it Would Mean for your Portfolio

By: Professor Pierre Fournier

Markets appear to have lost their inner Zen once again as we head into the final months of the year. I find it rather interesting how this seems to play out every autumn with September and October being the weakest months on average since 1950.

Markets have been exhibiting similar weaknesses this Fall. A few weeks ago the S&P/TSX was down nearly 6 percent from its August highs, pushing it back to the beginning of June levels, while the tech-heavy S&P 500 has given up 10 percent over the same period.

Aside from seasonal weakness, there is also an additional reason to be wary this year due to the upcoming U.S. election.

Maybe it’s because of human behaviour that we tend to be more negative once we return to the daily grind following the summer holidays. It also doesn’t help that the days are getting shorter and the temperatures cooler.

But despite the additional risks tied to the election and the second wave of COVID-19, it’s important to remember that healthy markets do go through cycles and not every pullback leads to a full-on crash. In today’s environment, I think the herding into the tech sector got ahead of itself especially when you see things like Zoom’s valuation being higher than Exxon Mobil.

That said, I just don’t see a fundamental shift especially when trying to take an objective view of other areas of the market and economy. For example, last month new single-family house sales for September were released showing that they surpassed an annual rate of 1 million for the first time in 14 years, and are up a whopping 43 percent from last year. There have also been positive signs on U.S. consumer spending.

Then you have the Federal Reserve continuing to pump a record amount of capital into the system and the expectation that the central bank will not raise interest rates until 2024 at the earliest. Most importantly, fiscal spending programs are setting new records globally with governments throwing everything they have at the virus. Perhaps this is why some stocks that serve as leading economic indicators, such as Caterpillar, continue to move higher and have recouped all of their losses.

Unless this changes, any further selling especially among sectors outside of technology, could represent a good buying opportunity for those willing to put their near-term negative emotions aside and start focusing on the long term.

U.S. election

When it comes to the impact on U.S. markets, I think a Biden win and Senate sweep would be viewed as a "short near-term negative", especially given his plans to hike corporate tax rates from 21 percent to 28 percent, and individual tax rates to 39 percent from 37 percent and treating capital gains and dividends as ordinary income.

Then there are the remains of the U.S. energy sector, which would face much greater environmental regulation (and that includes pipelines).

On the flip side, any added regulations could help push the over-supplied sector closer to balance – a flight of capital away from U.S. shale could be a big plus for other jurisdictions. This could be an opportunity for Canada to diversify globally, with the Keystone pipeline likely facing more hurdles under a Biden administration.

That being said, with Joe Biden's lead widening in the polls, there's less of a chance for a contested election. A clear-cut Democrat victory could avoid a long and messy legal battle and provide certainty to markets that have been nervous about election risks. Polls are shifting from a close election and prolonged uncertainty to more a dominant Biden and clean succession. That is reducing uncertainty and increasing risk appetite.

That confidence, combined with continued economic recovery, will help support equity markets and potentially even a rotation into riskier shares.

Nevertheless, investors should look past the "noise" and focus on the long term. Focus on your long term objectives matters much, much more than… the exact noise and shenanigans around the U.S. election.

A Biden victory is not going to change the number of phones Apple sells or the number of packages that Amazon delivers or the amount of oil pumped in Canada. In the end, it doesn't change the fundamentals.

Disclaimer: This article is intended to be used and must be used for informational purposes only. It is very important to do your own analysis before making an investment based on your own personal circumstances.

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