2020 Foresight – Part 2: A U.S Presidential Election Blog Series from TDAM

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"Winning or losing of the election is less important than strengthening the country"
~ Indira Gandhi

In our first blog, Michael Craig, Managing Director and Head of Asset Allocation and Derivatives provided his insights on what investors could expect based on the various possible outcomes of the election. In today's blog we share a chat we had with David Sykes, Managing Director and Head of Public Equities. During our chat, David provided some insights on the potential impact of the election on equities.

Generally speaking, what are your views on the broader market implications of either a Biden or Trump election win?

DS: Many hold an assumption that a democratic presidency would be harmful to the stock market, but this may not necessarily be the case. Besides the presidency, it will depend on which party controls the House and Senate, and what policies will be implemented. To the Fundamental Equity team, we monitor politicians' actions rather than their words. In 2016 when most anticipated a stock market plunge on a Trump win, the opposite actually happened as Trump's pro-business policies boosted the stock market thereafter.

When assessing policies, instead of looking at the market as whole, we analyze fundamental impact at the industry and company level as different business models will react very differently. As such, until the market has a clearer picture of what exact policies are being enacted, volatility is likely to be elevated.

In your view, which candidates' policies are more favourable for sustaining a longer-term economic growth trajectory?

DS: Both candidates have policies that help sustain long-term economic growth. If we breakdown potential economic growth to growth of labour inputs and growth of labour productivity, Trump's lower tax rate can help continue to increase labour participation as real wage grows. For businesses, more tax savings could be reinvested back into technology to improve productivity. While Trump's tax policies appear more helpful for growth, his trade war with China could weigh on the economy. On the other hand, while Biden's higher tax policies would be a challenge for corporate earnings, his more liberal immigration policies could potentially increase labour size and support longer-term economic growth.

On balance, it's too early to determine who can better sustain the long-term economy. It will largely depend on what policies are implemented and when.

If Democrats are successful in winning the presidency and reclaiming the senate, could this signal a clearer path for more significant policy changes and trigger increased market volatility?

DS: Biden has maintained a stable lead in polls, which might contribute to heightened market volatility. At this point in time, it would be irrational to change investment strategies simply based on a higher probability of a Biden presidency. And yes, while Biden wants to reverse the tax cuts, it's not a complete reversal, so the impact on corporate earnings may not be as bad as many anticipate. We anticipate, regardless of who wins, the immediate responsibility of the new president would likely be to sustain the recovery and bring back jobs to the millions who lost their jobs due to the pandemic.

If Trump wins a second term and republicans retain control of the senate, do you expect this to be a more favorable scenario for markets?

DS: History tells us that markets prefer certainty. A continuation of Trump's policies can be more favourable. But again, it will depend on the house and senate compositions and what policies will eventually be implemented. The growing tension between the two largest economies could also bring back volatility.

Overall, what ultimately matters are policy and the impact of that policy on growth and corporate profits.

Under the scenario of a contested election outcome; how might an extended period of uncertainty impact markets and investor sentiment?

DS: There are still many uncertainties, which drive market volatility - this is nothing new. While we cannot predict election results, what is certain is that the market does not go in a straight line - one way or the other. This therefore creates exploitable investment opportunities for active investors.

When market declines are driven primarily by fear, we often take opportunities to buy high quality businesses with sustainable competitive advantages and growing cash flows. When the market rises quickly, we often reallocate exposure from overheated names to undervalued ones. Ultimately, our team is focused on longer-term investment objectives and we use short-term market disruptions to help our clients achieve their long-term financial goals. For the portfolios I run, I'll continue to focus on companies that are high quality and will pay and grow dividends throughout this challenging period. Regardless of a Biden or Trump presidency, it will not change the long-term investment themes in our portfolios.

Be sure to check out the TDAM Views Blog next week for our next installment of the series which will focus on fixed income.

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