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This is one of the most confusing times in American politics. Who’s right, and who’s wrong, and who’s going to prevail in spite of whether they are right or wrong in your eyes? This is the short view. In the intermediate view, who’s going to actually do what they say, and will they have the Congressional support to do so? And finally, in the long view, how much of an impact will all of this actually have in the American economy and the American lifestyle? Right now, the outcome is definitely clouded by the ‘fog of war.’ The cloud, and the fog, resides in the myriad of opinions swirling through the news media. Opinion polling, once a disciplined and consistent indicator of outcomes, has become very compromised. A recent Cato Research poll suggests 62% of Americans feel uncomfortable sharing their political views, with Republicans twice as reluctant to share their preference as Democrats. So, while the early polls favor Biden, as they did Clinton at this point, who knows?
An added point of confusion will ride with when the election results are actually tallied and decided. With the surge of mail-in ballots, and the differing processes for counting those ballots, we may not know the results of the election for several day after November 3rd. If the election is close, and contested, we may not know the results for several weeks, which may involve the Supreme Court, as it did in 2000. And while both parties have billed this race as a ‘game-changer,’ from an historical perspective this hasn’t been the case for financial markets. The U.S. political process was designed with checks and balances. Mid-term elections have served as a built-in course corrector when voters have been dissatisfied with political directions. Elections induce volatility. Long-term drivers of the economy supersede political activity.
The COVID-19 resurgence continues to be on the front of the news and the front concern of investors. It is a very real health concern that deserves the attention of our nation. Much more is known about this virus than a year ago, and much more is yet to learn. We know who the most vulnerable segment of the population is, the elderly. We know transmission is possible from asymptotic individuals, a complication that is difficult to manage. Vaccines and treatments are still in development. COVID-19 is an intermediate-term issue. But the Economy is still the dominant issue.
From an economic standpoint, there has been nothing normal about 2020. The government-induced massive nationwide shutdown of ‘non-essential’ businesses caused Gross Domestic Product (GDP) to drop at a -31.4% annual rate in the second quarter, the biggest drop since the 1930’s. Since then, we have witnessed the economy rebound in a V-shaped recovery. Even with the huge V-shaped bounce, the third quarter GDP will be -2.9% lower than it was a year ago. The ‘bounce’ numbers are impressive. Car and light truck sales rose at a +246% annual rate in the third quarter. Business investment grew at a +22.4% annualized rate. Home building grew at a +15% annualized rate. Forward estimates for GDP in the third quarter are for an annualized +33.4%.
Financial markets have averaged positive annual gains in all historical political scenarios since 1933. The most favored backdrop for stock markets has occurred during ‘gridlock’ when party control is split three ways between the Senate, the House, and the Executive branches. ‘Who controls what’ really doesn’t have that great an impact. The Electoral College casts their official ballots on December 14th . Should the Supreme Court be required to resolve a contested election, their decision should be rendered in the next couple of weeks. Financial markets don’t like uncertainty and news media-induced drama. But any volatility associated with that uncertainty should be short-lived before markets move upward and onward with the economy.
Edward D. Foy, Manager, SELECTOR® Money Management, Chief Investment Officer, Foy Financial Services, Inc.