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2020 – The Election

By Monday, November 9, 2020Blog

Background

Joe Biden secured the majority of the electoral college votes (exceeding 270) to become President-Elect. Currently, it seems likely that Republicans will maintain control of the Senate and Democrats will hold majority in the House of Representatives. A split Congress should lead to continued gridlock, making it more difficult for the new administration to speedily enact its full agenda. However, outstanding votes in Georgia could still swing the Senate back toward Democrats. Regardless of the outcome of the elections, the immediate task for the new President will be managing the nation’s economic recovery from the COVID-19 pandemic. Below, we highlight policy issues most likely to be in focus under the administration and the anticipated impact on markets.

Taxes and Spending

Perhaps the most anticipated change for investors is an increase in taxes on wealthy individuals and corporations (top income tax bracket increasing from 37% to 39.6%, long-term capital gains taxed at ordinary income rates for those exceeding $1 million in income and the corporate tax rate jumping from 21% to 28%).

Biden’s justification for raising taxes is to pay for the new administration’s increased spending on COVID-relief, state and local governments, infrastructure (clean energy, school modernization and road repairs), childcare, education, health care, retirement, disability benefits, and climate change.

If the House and Senate remain gridlocked, the probability of these fiscal policy changes would be materially reduced.

Anticipated Market Impact – positive for equities, negative for municipal bonds, lower yields for longer.

Regulations

Again, a split Congress could reduce the anticipated regulatory pressure directed toward Technology (anti-trust), Energy (climate/environment) and Banking (Dodd-Frank) sectors, and federal courts may play an increasing role in the outcome.

Anticipated Market Impact – positive for equities (favors quality growth).

Trade

A Biden administration would likely result in more predictability and transparency on trade, and a more united approach to confront China on technology and intellectual property issues. The use of tariffs is popular with some on both sides of the aisle, so any attempt to eliminate them could meet firm opposition. Biden has introduced proposals to ensure products are made in the US and boost manufacturing jobs, including a plan for the federal government to spend $400 billion over four years on American goods.

Anticipated Market Impact – benefit global trade, supporting both US and non-US equities (moderately weaker USD).

Other Considerations

Should fiscal policy be more constrained, the Fed may be required to adopt a more proactive approach with monetary policy – maintaining lower rates (through 2023), expanding use of lending programs, especially for small businesses and state and local governments.

Anticipated Market Impact – positive for equities, corporate credit and duration as rates and inflation are likely to remain range bound and more predictable.

Our Position

Volatility can be expected in the short-term as we await the final elections results and investors may react differently based on their political leaning. However, in the long run, Presidential elections generally have limited impact on financial market outcomes. Rather, future returns are driven by fundamental factors: interest rates, valuations, inflation, etc. With that said, a split Congress with a Democratic President, has historically been bullish for equities.

COVID-19 continues to pose a larger near-term risk than any specific policy changes. If the virus is not contained and shutdowns persist, economic growth will remain challenged.

Increased deficit spending will further contribute to the national debt, but it will also incentivize the Fed to keep interest rates low and contain the cost of borrowing. To date, record-high debt and record-low interest rates have not meaningfully impacted inflation. Despite the Fed’s best efforts to boost inflation, it has stubbornly remained below the stated 2% target. Valuations will continue to be driven by investor sentiment, which can be difficult to predict.

Even with safe-haven bonds yielding around 1% or less, it is still prudent to maintain some exposure to traditional fixed income, including cash, for portfolio ballast and liquidity. However, for investors seeking to achieve meaningful real-returns going forward, portfolios should include considerable exposure to equities and real estate. Depending on risk tolerance and liquidity needs, investors should also evaluate private market opportunities in equities, credit and real estate, where less transparency and more complexity can create unique opportunities to enhance returns.

  

 Disclaimers:

The views expressed herein are those of Asset Consulting Group (ACG). They are subject to change at any time. These views do not necessarily reflect the opinions of any other firm. This report was prepared by ACG for you at your request. Although the information presented herein has been obtained from and is based upon sources ACG believes to be reliable, no representation or warranty, express or implied, is made as to the accuracy or completeness of that information. Accordingly, ACG does not itself endorse or guarantee, and does not itself assume liability whatsoever for, the accuracy or reliability of any third party data or the financial information contained herein.

 

Certain information herein constitutes forward-looking statements, which can be identified by the use of terms such as “may”, “will”, “expect”, “anticipate”, “project”, “estimate”, or any variations thereof. As a result of various uncertainties and actual events, including those discussed herein, actual results or performance of a particular investment strategy may differ materially from those reflected or contemplated in such forward-looking statements. As a result, you should not rely on such forward-looking statements in making investment decisions. ACG has no duty to update or amend such forward-looking statements.

The information presented herein is for informational purposes only and is not intended as an offer to sell or the solicitation of an offer to purchase a security.

 Please be aware that there are inherent limitations to all financial models, including Monte Carlo Simulations. Monte Carlo Simulations are a tool used to analyze a range of possible outcomes and assist in making educated asset allocation decisions. Monte Carlo Simulations cannot predict the future or eliminate investment risk. The output of the Monte Carlo Simulation is based on ACG’s capital market assumptions that are derived from proprietary models based upon well-recognized financial principles and reasonable estimates about relevant future market conditions. Capital market assumptions based on other models or different estimates may yield different results. ACG expressly disclaims any responsibility for (i) the accuracy of the simulated probability distributions or the assumptions used in deriving the probability distributions, (ii) any errors or omissions in computing or disseminating the probability distributions and (iii) and any reliance on or uses to which the probability distributions are put. The projections or other information generated by ACG regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results and are not guarantees of future results. Judgments and approximations are a necessary and integral part of constructing projected returns. Any estimate of what could have been an investment strategy’s performance is likely to differ from what the strategy would actually have yielded had it been in existence during the relevant period. The source and use of data and the arithmetic operations used for calculating projected returns may be incorrect, inappropriate, flawed or otherwise deficient.

Past performance is not indicative of future results. Given the inherent volatility of the securities markets, you should not assume that your investments will experience returns comparable to those shown in the analysis contained in this report. For example, market and economic conditions may change in the future producing materially different results than those shown included in the analysis contained in this report. Any comparison to an index is for comparative purposes only. An investment cannot be made directly into an index. Indices are unmanaged and do not reflect the deduction of advisory fees.

 This report is distributed with the understanding that it is not rendering accounting, legal or tax advice. Please consult your legal or tax advisor concerning such matters. No assurance can be given that the investment objectives described herein will be achieved and investment results may vary substantially on a quarterly, annual or other periodic basis. There is no representation or warranty as to the current accuracy of, nor liability for, decisions based on such information.

Gryphon Financial Partners shall not in any way be liable for claims and make no expressed or implied representations or warranties as to their accuracy or completeness or for statements or errors contained in or omissions from them. This was created for informational purposes only. Gryphon Financial Partners, LLC is an Investment Adviser.

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