“Good investors gather information, put that information into current and historical context, then make sound decisions.”
The election process, as expected, is still being challenged, especially for the two Georgia Senate seats. The presidential election was surprisingly close given the polling projections the week prior to the vote, with Biden holding a 6% lead versus Clinton’s 2% lead four years earlier. Yet the election came down to a few swing states once again. Despite the Democrats probable victory for the executive office, it was the Republicans who held ground in the Senate and gained 10 seats in the House. The ‘Blue Wave’ fizzled out. This is a telling prospect for the upcoming mid-term elections, where the Republicans are in reach of regaining control of the House.
Not surprisingly, financial markets advanced sharply the week of the election, making their initial move the day before Election Tuesday. This is consistent with historical responses to elections, where the process takes precedent over the outcome. As we have stated before, financial markets are simply not as vulnerable to elections as people would expect, regardless of who wins or why. This is because institutional investors do not invest in term-limit presidents, they invest in long-term American corporations. In spite of the passionate predictions of what will happen if ‘The Right Guy’ isn’t elected, the American economy pushes forward, continuing to solve difficult problems and finding new solutions.
Which brings us to the COVID vaccines. The timing of the press release from Pfizer, the Monday after the election, will be discussed in political science forums for years, (as will the power of the media in determining the outcome of the 2020 presidential race.) But the reality of the science of the mRNA vaccine technology is a true game changer in how modern medicine faces the challenge of viral infectious disease. The availability for these new vaccines is not yet determined, but the relative reported effectiveness in clinical trials from both Pfizer and Moderna has been phenomenal and unprecedented.
There has been a very specific rotation in equity markets in the fourth quarter away from large cap growth stocks toward value stocks. We have followed that rotation and have engaged in broad portfolio rebalancing in managed portfolios. This process resulted in taking long-term capital gains in positions that have been held for several years. All of the managed portfolio models continue to hold additional fixed income positions, generally in the range of 20% of the portfolio, in response to the high volatility that persists in equity markets. Bond markets, despite the record low interest rate environment, have continued to be productive. Given the multitude of unprecedented events that have occurred in 2020, it is surprising how well financial markets are performing, albeit with very high volatility.
Institutional investors are looking well into 2021 at this juncture, so the positive performance in equity markets is quite promising. One reason for high expectations is the extremely low interest rate environment. Corporations thrive in low interest rate scenarios because they can borrow at low single digits and produce in double digits. Additionally, dividend yields from equities are equal to, or higher, than bond yields. This creates a compelling case for owning equities. Another significant positive for equity markets and for the economy is that both parties are motivated to pass broad infrastructure legislation in 2021. This should be a bi-partisan bill that passes easily, benefiting the economy with both jobs and fiscal support for transportation systems, communication networks, sewage, water and electric systems. With the Republican stopper in the Senate, radical changes in tax laws, tariffs and far-left agenda items should be throttled as the Democratic party searches for its center, and clings to their thin grasp of the House. So where do we go from here? We get back to the business of business and step away from the business of politics.
Edward D. Foy, Manager, SELECTOR® Money Management, Chief Investment Officer, Foy Financial Services, Inc.