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"Winning or losing of the election is less important than strengthening the country"
~ Indira Gandhi
As we head into the home stretch of what seems like the longest election season on record, we can start to better assess what the political and investment landscape might look like when the ballots are counted and winners are declared. That said, the path to this destination remains unclear as the norms we've grown accustomed to are unlikely to be observed this coming election day. It's becoming apparent that given the unique circumstances of this election, we will likely not see a winner declared on November 3 as it believed that many voters will be voting remotely. There will also likely be no gracious concession from the losing candidate and no celebration of victory by the winner.
We spoke to the TD Asset Management Inc. ("TDAM") fixed income portfolio management team about what they are watching for over the next few weeks heading into the election, potential opportunities given possible outcomes and investment strategy given the prevailing uncertainty.
Scott Colbourne, Managing Director, Portfolio Manager, Global Fixed Income
Our colleagues in asset allocation did an excellent job in an earlier post discussing what investors can expect policy-wise given potential election outcomes. David Sykes highlighted what a Trump or Biden presidency might mean for equity markets and economic growth in the future. Given that regardless the winner, monetary policy of the Federal Reserve will likely remain accommodative, I'd like to focus on what potential outcomes might mean for currency, an important driver of global returns.
Blue Wave – Biden presidency, Democrats gain control of the Senate:
Increased fiscal spending enacted by Democrats could lead to a depreciation of the USD. However, the view that democratic leadership is a negative for risk markets is perhaps overstated. A Biden presidency is likely a positive for global trade and emerging markets.
Status Quo – Trump presidency, Republicans retain control of the Senate
We’re likely to see a continuation of the policies that have shaped Trump's first term – tax cuts, trade conflict and deregulation. In this scenario the USD is likely to be steady or slightly appreciate, global growth could be hampered at the expense of emerging markets and fiscal spending could be less than currently anticipated.
Split Decision – Biden presidency, Republicans retain control of the Senate
In a word, this scenario would produce a term of gridlock. However, gridlock tends to remove the likelihood of uncertainty, a good thing for risk markets. The USD likely experiences little pronounced upward or downward pressure in this scenario.
Robert Pemberton, Managing Director, Head of Fixed Income
The campaigns we've been observing south of the border continue to be interesting to say the least. In a time where the world is searching for consumable content, the political theatre surrounding this race has become must-see tv for a lot of us. Unfortunately, the first presidential debate was far more spectacle than substance – it was good to see cooler heads prevail in the recent vice-presidential contest.
2020's October surprise was right on schedule as the President announced via twitter, of course, that he and the First Lady had contracted COVID-19. While this announcement briefly shook risk markets, it was the President's abrupt proclamation that any negotiation about further stimulus spending would be delayed until after the election that has most recently spooked investors. Markets recovered as the White House walked back these statements in the wake of a market sell-off and negative polling numbers. We expect to see episodes of volatility driven by headlines as the contest draws to a close. Over the next few weeks, the key is to expect the unexpected and focus on long term investment objectives.
Unexpected outcomes in elections are certainly nothing new, particularly in recent memory. The US electorate was upended in the last Presidential election when presumed favorite Hilary Clinton was defeated by then Washington outsider, Donald Trump. British voters were shocked a few months earlier in the summer of 2016 when votes were tabulated and it was determined that the United Kingdom would leave the European Union.
The potential for an inconclusive result on election day is also not unprecedented. In 2000, hanging chads on Florida ballots lead to a protracted debate about the election's winner. A debate that was ultimately settled by the US Supreme Court. It wasn't until December 13, 36 days following the election, that Al Gore conceded victory to George W Bush.
In this environment of uncertainty, it is critical to focus on long -term objectives and not be swayed by the latest headline or poll. While our investment teams are driven by passion, we are defined by discipline. It is this discipline and adherence to our long-established investment processes that we believe will continue to drive positive outcomes for our clients.
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