georgecmatthews

[georgecmatthews]

Tactical asset allocation — November 2020

Macro update

The return of the coronavirus across Europe and the Americas represents an important risk factor for the global economic recovery. We contemplated this risk back in the spring and outlined a baseline scenario of a meaningful second wave of COVID-19 infections across the northern hemisphere upon the return of colder temperatures. The probability of a double-dip recession in Q4 2020 is certainly increasing across multiple regions, but it does not need to translate into the same economic and financial shock experienced with the first wave. A combination of ample monetary and fiscal policy support, together with economic adjustments and measures implemented over the past seven months, is likely to reduce the uncertainty associated with this second wave compared to the first. While it is certainly too early to draw definitive conclusions, as the situation remains very fluid, our forward-looking measures of economic activity and market sentiment continue to suggest the global economy should remain in a recovery regime in the near term (Figure 1).

Figure 1: Leading economic indicators and market sentiment suggest the global economic recovery continues, with emerging markets moving to an expansion regime

Sources: Bloomberg, L.P., Macrobond as of Oct. 31, 2020. Invesco Investment Solutions research and calculations. Proprietary leading economic indicators of Invesco Investment Solutions.

The speed of the recovery is flattening across regions as the V-shaped rebound begins to normalize and most economies begin to approach trend-growth rates. Notably, the relative growth momentum between the United States and other developed markets has tilted in favor of the former, as a result of catch-up effects and the anticipation of new, selective lockdown measures implemented in the eurozone and the UK. Emerging markets, particularly Asia, continue to lead the cycle and, according to our framework, have now entered an expansion regime with growth above-trend and improving. Despite recent underperformance in equity markets and increased volatility, our measure of global market sentiment suggests some resilience and confidence in the marketplace on the global recovery for now. Current events ranging from the US election to the evolution of the pandemic will drive the path of investor confidence and growth expectations over the next couple of months. We will closely monitor the evolution of our framework and reposition our investment strategies accordingly.

Investment positioning

We have implemented one change this month, closing our overweight exposure to developed market equities outside the US. While local market and currency valuations remain supportive, their relative growth momentum is weakening, leading us to a neutral stance between the two regions (Figure 2).

Figure 2: Relative tactical asset allocation positioning

Source: Invesco Investment Solutions, Oct. 31, 2020. For illustrative purposes only. Allocations for Invesco Global Allocation Fund. Light blue represents equity risk categories, while dark blue represents fixed income. Risk measured by tracking error.

We maintain a higher risk posture than our benchmark1 in the Invesco Global Allocation Fund, sourced through an overweight exposure to equities and credit at the expense of government bonds. In particular:

Within equities, we hold large tilts in favor of emerging markets compared to developed markets, driven by favorable cyclical conditions, improving risk appetite, attractive local asset valuations, and an expensive US dollar.

In fixed income, we maintain an overweight exposure to US high yield credit, emerging markets sovereign dollar debt, and event-linked bonds at the expense of investment grade corporate credit and government bonds, particularly in developed markets outside the US. Overall, we are overweight credit risk and neutral duration2 versus the benchmark.

In currency markets, we maintain an overweight exposure to foreign currencies, positioning for long-term US dollar depreciation. Within developed markets we favor the euro, the Canadian dollar and the Norwegian kroner. In emerging markets, we favor the Indian rupee, Indonesian rupiah, and Russian ruble.

1 Global 60/40 benchmark (60% MSCI All Country world Index /  40% Bloomberg Barclays Global Agg USD Hedged)

2 Credit risk defined as DTS (duration times spread).

Important information

Blog header image: Rodrigo Kugnharski / Unsplash

The MSCI All Country World Index is an unmanaged index considered representative of large- and mid-cap stocks across developed and emerging markets.

The Barclays Global Aggregate Index is an unmanaged index considered representative of the global investment grade, fixed income markets.

Credit risk defined as DTS (duration times spread).

Tracking error measures the divergence between price behavior of a portfolio and the price behavior of a benchmark.

The risks of investing in securities of foreign issuers, including emerging market issuers, can include fluctuations in foreign currencies, political and economic instability, and foreign taxation issues.

Fixed-income investments are subject to credit risk of the issuer and the effects of changing interest rates. Interest rate risk refers to the risk that bond prices generally fall as interest rates rise and vice versa. An issuer may be unable to meet interest and/or principal payments, thereby causing its instruments to decrease in value and lowering the issuer’s credit rating. Junk bonds involve a greater risk of default or price changes due to changes in the issuer’s credit quality. The values of junk bonds fluctuate more than those of high quality bonds and can decline significantly over short time periods.

Issuers of sovereign debt or the governmental authorities that control repayment may be unable or unwilling to repay principal or interest when due, and the Fund may have limited recourse in the event of default. Without debt holder approval, some governmental debtors may be able to reschedule or restructure their debt payments or declare moratoria on payments.

The dollar value of foreign investments will be affected by changes in the exchange rates between the dollar and the currencies in which those investments are traded.

Before investing, investors should carefully read the prospectus and/or summary prospectus and carefully consider the investment objectives, risks, charges and expenses. For this and more complete information about the fund(s), investors should ask their financial professionals for a prospectus/summary prospectus or visit invesco.com.

The opinions expressed are those of the author as of Nov. 13, 2020, are based on current market conditions and are subject to change without notice. These opinions may differ from those of other Invesco investment professionals.

Forward-looking statements are not guarantees of future results. They involve risks, uncertainties and assumptions, there can be no assurance that actual results will not differ materially from expectations. Diversification does not guarantee a profit or eliminate the risk of loss.

from Expert Investment Views: Invesco Blog https://www.blog.invesco.us.com/tactical-asset-allocation-november-2020/?utm_source=rss&utm_medium=rss&utm_campaign=tactical-asset-allocation-november-2020

[georgecmatthews]

SteelPath November MLP updates and news

Midstream equities outperformed the broader markets in October as third-quarter earnings season kicked off with better-than-expected results. Increasing midstream free cash flows are expected to bolster improve balance sheets in the years ahead as capital spending requirements have ebbed.

MLP market overview

Midstream MLPs, as measured by the Alerian MLP Index (AMZ), ended October up 2.9% on a price basis and up 4.3% once distributions are considered. The AMZ outperformed the S&P 500 Index’s 2.7% total return loss for the month. The best performing midstream subsector for October was the Gathering and Processing group, while the Diversified subsector underperformed, on average.

For the year through October, the AMZ is down 48.7% on a price basis, resulting in a 43.5% total return loss. This compares to the S&P 500 Index’s 1.5% and 3.1% price and total returns, respectively. The Propane group has produced the best average total return year-to-date, while the Diversified subsector has lagged.

MLP yield spreads, as measured by the AMZ yield relative to the 10-year US Treasury bond, narrowed by 73 basis points (bps) over the month, exiting the period at 1,337 bps. This compares to the trailing five-year average spread of 678 bps and the average spread since 2000 of approximately 415 bps. The AMZ indicated distribution yield at month-end was 14.2%.

Midstream MLPs and affiliates raised no new marketed equity (common or preferred, excluding at-the-market programs) or debt during the month. No new asset acquisitions were announced in October.

West Texas Intermediate (WTI) crude oil exited the month at $35.79 per barrel, down 11.0% over the period and 33.9% lower year-over-year. Natural gas prices ended October at $3.35 per million British thermal units (MMbtu), up 32.7% over the month and 27.4% higher than October 2019. Natural gas liquids (NGL) pricing at Mont Belvieu exited the month at $19.90 per barrel, 4.6% higher than the end of September and 9.6% lower than the year-ago period.

News

Energy Transfer making changes. Energy Transfer (ET) announced that Kelcy Warren will turn over the Chief Executive Officer position to long-time ET executives Mackie McCrea and Tom Long, effective Jan. 1, 2021. Warren will remain as Executive Chairman and Chairman of the Board of Directors. As Co-CEOs, McCrea and Long will work together in the manner of an “Office of the CEO” and will jointly direct the business of the Partnership. Warren will continue to be actively involved in the strategic direction of the Partnership. Later in the month ET elected to reduce its distribution by 50% and, likely, increase its focus on debt reduction. Standard and Poor’s immediately affirmed Energy Transfer’s investment grade rating (BBB-) and Moody’s affirmed its investment grade rating (Baa3) the following day.

Third-quarter earnings season commences. Third-quarter reporting season began in October. Through month-end, 47 midstream entities had announced distributions for the quarter, including four distribution increases, two reductions, and 41 distributions that were unchanged from the previous quarter. Through the end of October, 11 sector participants had reported third-quarter financial results. Operating performance has been, on average, better than expectations with EBITDA, or Earnings Before Interest, Taxes, Depreciation and Amortization, coming in 5.5% higher than consensus estimates and 9.9% higher than the preceding quarter.

TRP Proposes to Buy TCP. TC Energy (TRP CN) made a non-binding offer to acquire all outstanding common units of TC Pipelines (TCP) that it does not already own, with an exchange ratio of 0.65 common units of TRP for each unit of TCP, representing an implied value of $27.31/unit based on the Oct. 2 closing price of TRP, or a 7.5% premium to the 20-day weighted average price of TCP common units. A Conflicts Committee composed of independent directors of the TCP Board will be formed to consider the offer pursuant to its processes.

Chart of the month: rising free cash flow bolsters midstream balance sheets

As midstream cash flows have remained resilient, and as the industry continues to rationalize capital spending, estimates for sector free cash flow1 have significantly increased. Further, as market participants are no longer rewarding distribution growth, midstream energy sector participants are largely expected to hold distributions steady and let excess cash flow accrue to the balance sheet.

The chart below presents estimates from Wells Fargo for total free cash flow and distributions/dividends for the publicly traded US midstream companies through 2025. We believe the difference between each year’s free cash flow and the cash payouts to equity investors may be used to reduce borrowings and, to a lesser extent, buyback undervalued equity units.

Source: Wells Fargo as of 10/31/2020.Past performance does not guarantee future results. “E” represents estimates. No guarantee that estimates will come to pass. Free cash flow is defined as distributable cash flow less growth capital expenditures and acquisitions, where distributable cash flow represents cash flow generated by the company’s operations reduced by expenditures to maintain the assets.

Important Information

Image credit: Abstract Aerial Art / Getty

Source: All data sourced from Bloomberg as of 10/31/2020 unless otherwise stated.

Defined as distributable cash flow less growth capital expenditures and acquisitions, where distributable cash flow represents cash flow generated by the company’s operations reduced by expenditures to maintain the assets.

The opinions referenced above are those of the author as of Nov. 2, 2020. These comments should not be construed as recommendations, but as an illustration of broader themes. Forward-looking statements are not guarantees of future results. They involve risks, uncertainties and assumptions; there can be no assurance that actual results will not differ materially from expectations.

Midstream operators and companies are engaged in the transportation, storage, processing, refining, marketing, exploration, and production of natural gas, natural gas liquids, crude oil, refined products or other hydrocarbons.

The mention of specific companies, industries, sectors, or issuers does not constitute a recommendation by Invesco Distributors, Inc. A list of the top 10 holdings of each fund can be found by visiting invesco.com.

As of 9/30/2020, Invesco SteelPath MLP Alpha Fund, Invesco SteelPath MLP Income Fund, Invesco SteelPath MLP Select 40 Fund and Invesco SteelPath MLP Alpha Plus Fund held 13.91%, 12.47%, 4.98% and 13.79%, respectively in Energy Transfer LP.

As of 9/30/2020 Invesco SteelPath MLP Alpha Fund, Invesco SteelPath MLP Income Fund, Invesco SteelPath MLP Select 40 Fund and Invesco SteelPath MLP Alpha Plus Fund held 10.15%, 0.00%, 4.59% and 9.97%, respectively in TC Pipelines LP.

The S&P 500 Index is a stock market index that measures the stock performance of 500 large companies listed on stock exchanges in the United States.

The Alerian MLP Index is a float-adjusted, capitalization-weighted index measuring master limited partnerships, whose constituents represent approximately 85% of total float-adjusted market capitalization. Indices are unmanaged and cannot be purchased directly by investors.

Index performance is shown for illustrative purposes only and does not predict or depict the performance of any investment. An investment cannot be made into an index. Past performance does not guarantee future results

A yield spread is the difference between yields on differing debt instruments of varying maturities, credit ratings, issuer, or risk level, calculated by deducting the yield of one instrument from the other. 

Most MLPs operate in the energy sector and are subject to the risks generally applicable to companies in that sector, including commodity pricing risk, supply and demand risk, depletion risk and exploration risk. MLPs are also subject the risk that regulatory or legislative changes could eliminate the tax benefits enjoyed by MLPs which could have a negative impact on the after-tax income available for distribution by the MLPs and/or the value of the portfolio’s investments. Although the characteristics of MLPs closely resemble a traditional limited partnership, a major difference is that MLPs may trade on a public exchange or in the over-the-counter market. Although this provides a certain amount of liquidity, MLP interests may be less liquid and subject to more abrupt or erratic price movements than conventional publicly traded securities. The risks of investing in an MLP are similar to those of investing in a partnership and include more flexible governance structures, which could result in less protection for investors than investments in a corporation. MLPs are generally considered interest-rate sensitive investments. During periods of interest rate volatility, these investments may not provide attractive returns.

Energy infrastructure MLPs are subject to a variety of industry specific risk factors that may adversely affect their business or operations, including those due to commodity production, volumes, commodity prices, weather conditions, terrorist attacks, etc. They are also subject to significant federal, state and local government regulation.

The opinions expressed are those of Invesco SteelPath, are based on current market conditions and are subject to change without notice. These opinions may differ from those of other Invesco investment professionals.

Before investing, investors should carefully read the prospectus and/or summary prospectus and carefully consider the investment objectives, risks, charges and expenses. For this and more complete information about the fund(s), investors should ask their advisors for a prospectus/summary prospectus or visit invesco.com.

from Expert Investment Views: Invesco Blog https://www.blog.invesco.us.com/steelpath-november-mlp-updates-and-news/?utm_source=rss&utm_medium=rss&utm_campaign=steelpath-november-mlp-updates-and-news

[georgecmatthews]

‘FOMO’ and the (extremely) high price of certainty

Emerging market (EM) growth stocks have had an unprecedented run versus value over the past decade. The pandemic has amplified the run of growth stocks and, in our view, led to pockets of excessive valuation. We believe the “certainty” of the COVID-19 trends may, in a number of spots, lead only to the certainty of significant loss at these valuation levels. Despite growth’s extraordinary bifurcation with value stocks, we recommend investors embrace greater nuance in thinking through the value versus growth debate.

Two trends that have boosted growth stocks

Growth stocks have been clear beneficiaries of the two big trends in financial markets under COVID-19 — negative real rates and great economic uncertainty. These twin forces have made extrapolation of the future incredibly challenging for investors, leading to a relentless search for certainty in obvious “digital” winners.  Add to that a powerful case of FOMO (fear of missing out), and you have the ingredients for worrying levels of concentration and pockets of structurally overvalued companies.

COVID-19 has essentially amplified trends that were already underway in EM and accelerated the prospects of e-commerce, fintech, food delivery, ride-hailing, gaming, cloud, and other similar digitally driven companies. In many cases, the assumptions of what these disruptive growth companies can deliver and the valuations they have reached have become untethered from reality, in our view. Imagination is a critical trait in creating differentiated portfolio results, but much of the hyperbolic gravitas is conventional wisdom, divorced from rigorous diligence. The herculean assumptions being made to justify current valuations often fail to appreciate fierce competitive structures across many of these industries and the long and grinding battle companies face in their pursuit of market dominance. In essence, FOMO has become the primary investment motivation for many.

FOMO is on full display in Chinese stocks

An additional twist unique to EM is the focus on countries that have successfully contained the virus and had the administrative capacity to deal with the economic fallout.  China is a great example. Having generated the plurality of worldwide growth for the past 10 years, we believe China is poised to deliver over 50% of global GDP over the next couple years as the rest of the world slowly recovers from the economic impact of COVID-19.  We have argued for a structural bull market in China in one of our recent posts (Our hypothesis for a bull market in emerging markets equities), in part due to an increasing number of high-quality companies that are listing on local exchanges and offering better investment opportunities for China’s significant, and largely undiversified, pool of savings — which we believe will result in a major asset allocation shift into equities.  However, China’s resiliency and growth this year have put it on the radar of many equity managers on the hunt for “certainty,” and those with clear FOMO. We have observed a rapid increase in investor interest in China, most notably from those with little experience and no visible mandate investing there.  This heightened attention has led to pockets of excess.

Figure 1: EM growth has generally outperformed EM value over the past decade

Source: Morningstar. Data as of 10/31/20. The calendar year returns above are for the MSCI EM Growth and MSCI EM Value Indexes. An investment cannot be made in an index. Past performance is no guarantee of future results.

We believe the massive gap that has formed between growth and value will likely collapse, probably painfully, but this does not mean that traditional value stocks will be in ascendancy.  The classic mean reversion approach to value investing will likely prove unsuccessful, in our view, as many traditional industries face considerable structural challenges:  

E-commerce is an existential threat that has adversely impacted returns and growth prospects for brick-and-mortar retailers that are unable to adapt to omnichannel requirements.  

We expect fintech companies to persistently chip away at the funding and fee advantages of oligopolistic banks throughout EM.  

Oil and thermal coal companies face long-term pressure from the shift to a green economy.

A different perspective on the search for value in EM

In this context, relying on historical or normalized valuation multiples and an extrapolation mentality may not produce desired outcomes. Therefore, we embrace a different perspective on value — one that appreciates nuance and probabilistic thinking, and looks beyond the obvious.  

Nuanced value investing, in our view, is able to look beyond pandemic economic shock to companies and countries that are well-placed for rapid recovery, and to industries where consolidation may result in improved pricing, margins, and returns. These include companies such as hotels, restaurants, and airports, which we expect will more than mean revert under consolidation. This approach also looks to geographies dominated by informal economies like India, the Philippines, and Indonesia, which in our view will likely see V-shaped recoveries post-pandemic.

We believe this nuanced approach to value investing also works in companies that are suffering from heightened skepticism as a result of transient project delays or misplaced governance concerns, as well as in companies investing in adjacent, unproven business opportunities where uncertainty reigns. In all these, value investors must look beyond extrapolation of numbers and conduct differentiated research.  

Our approach to investing in EM equities maintains a long-term orientation and a focus on differentiated research. We do not have a FOMO gene, which has resulted in an unwillingness to bend to fashion. And, alas, a year of reasonably middle-of-the-pack performance. However, we strongly believe that our continued focus on investing in high-quality companies with durable growth opportunities, sustainable competitive advantage, real options, and appropriate valuations will allow us to avoid common landmines and position us to generate compelling returns over time.

Important Information:

Image Credit: Jerry Wang

The MSCI Emerging Markets Value Index captures large and mid-cap securities exhibiting overall value style characteristics across 26 EM countries.

The MSCI Emerging Markets Growth Index captures large and mid-cap securities exhibiting overall growth style characteristics across 26 EM countries.

The risks of investing in securities of foreign issuers, including emerging market issuers, can include fluctuations in foreign currencies, political and economic instability, and foreign taxation issues.

The opinions expressed are those of the author as of Nov. 11, 2020, are based on current market conditions and are subject to change without notice. These opinions may differ from those of other Invesco investment professionals.

from Expert Investment Views: Invesco Blog https://www.blog.invesco.us.com/fomo-and-the-extremely-high-price-of-certainty/?utm_source=rss&utm_medium=rss&utm_campaign=fomo-and-the-extremely-high-price-of-certainty

[georgecmatthews]

Five forces that could propel markets during a Biden presidency

While legal challenges are underway, the Associated Press on Saturday called Pennsylvania for Joe Biden, which would push him past the 270 Electoral Count threshold. While this process may feel like an eternity, Biden’s timing from a market perspective may be impeccable. Don’t get us wrong. There are challenges ahead. COVID-19 cases are rising, and the threat of economically damaging lockdowns is elevated. However, history has taught us that the presidents who have experienced outsized market returns typically were inaugurated in troubled economic environments. Presidents Reagan (high and rising inflation) and Obama (global financial crisis) immediately come to mind. Rather than dwell on the near-term negatives, let’s instead focus on the potential tailwinds that would likely be supportive to markets in a Biden administration.

Five potential tailwinds that could drive markets

Betting against an economic recovery is betting against medicine, science and human ingenuity. Significant progress has already been made in the fight against COVID, with scientists, government agencies and private industry working together to understand the virus, create and test potential vaccines, and pre-manufacture millions of doses of the most promising candidates to enable immediate distribution when a final vaccine is ready. The timing of a vaccine is still unclear, but is likely to emerge in the early years of the next presidential term.

The US Federal Reserve is poised to keep interest rates at, or near, zero for at least the first two years of Biden’s term. There is $4.3 trillion in money market assets, up from $3.6 trillion at the beginning of 2020, earning effectively nothing in interest.1 Among the Fed’s stated goals is to inflate away 2% of the value of that cash each year, thereby incentivizing consumers and investors to do something with that money. The adage about not fighting the Fed will likely apply over the next four years.

More fiscal support is likely forthcoming. While it may not be the outsized fiscal package that the Democrats had envisioned, it will likely be large enough to provide an additional boost to the economic recovery. Paradoxically, a more modest fiscal bill may serve to extend the market and business cycles, as it would be unlikely to bring forward the inflationary pressures that presage Fed tightening and the end of cycles.

Stocks are historically cheap to bonds2, and yet stocks have outperformed bonds over most time periods.3 Government-related bonds are not only overbought compared to stocks4 but may fall under pressure as interest rates rise in an economic recovery. Investors are likely to determine that in this type of environment, there few alternatives that offer the growth potential of equities.

Macro conditions do not need to be “good” for markets to trend higher. Instead, they need to be getting better. The US economy and S&P 500 Index recently experienced historic collapses. Economic activity and earnings growth are likely to be outsized during the next presidential term versus the 2020 comps.

Is this a “Goldilocks” environment?

Investors often ask strategists to compare the current environment to a period in the past. 2011 to 2014 comes to mind. Those years had a Democratic president, a divided Congress, an improving economic and earnings backdrop from very depressed levels, the Fed Funds Rate at zero, and stocks cheap to bonds. Forgive us for having déjà vu. That period proved to be favorable for equities and for credit.

In fact, this could be a Goldilocks environment — not too hot to cause inflation, but not too cold, either. A Biden presidency with a Republican Senate would be unlikely to see any increase in taxes, which was arguably the biggest fear investors had about a Biden presidency.  And a Biden presidency could mean a return to a more traditional, predictable approach to trade policy, which would likely result in less volatile markets.  But would it also mean stalled progress on other issues? Assuming a narrow Republican majority in the Senate, and a centrist approach by Biden, such a divided government might not mean total gridlock. In particular, Biden might be able to eke out a decent stimulus bill by forming a coalition with moderate Republican senators. While few may have expected this or wanted this outcome, it could prove to be a “best-case scenario.”

In short, Joe Biden has spent nearly half a century in politics, but his timing may yet prove impeccable.

1 Source: Investment Company Institute, as of Nov. 4, 2020

2 Source: Bloomberg, L.P., Standard & Poor’s, as of Sept. 30, 2020. As represented by the difference between the earnings yield of the S&P 500 Index and the 10-year US Treasury rate   

3 Sources: Bloomberg, L.P., Standard & Poor’s, looking at 10-year time periods, rolling monthly, going back to 1957. Based on the S&P 500 Index and the Bloomberg Barclays US Aggregate Bond Index.

4 Sources, Bloomberg, L.P., Organization for Economic Cooperation and Development

Important information

Blog image credit: Stephen Morris / Stocksy

Past performance does not guarantee a profit or eliminate the risk of loss.

All investing involves risk, including the risk of loss.

The S&P 500® Index is an unmanaged index considered representative of the US stock market.

The Bloomberg Barclays US Aggregate Bond Index is an unmanaged index considered representative of the US investment-grade, fixed-rate bond market.

The opinions referenced above are those of the authors as of Nov. 8, 2020. These comments should not be construed as recommendations, but as an illustration of broader themes. Forward-looking statements are not guarantees of future results. They involve risks, uncertainties and assumptions; there can be no assurance that actual results will not differ materially from expectations.

from Expert Investment Views: Invesco Blog https://www.blog.invesco.us.com/five-forces-that-could-propel-markets-during-a-biden-presidency/?utm_source=rss&utm_medium=rss&utm_campaign=five-forces-that-could-propel-markets-during-a-biden-presidency

[georgecmatthews]

Election 2020: Biden looks poised to win

Well, it’s all over but the shoutin’. In order for President Trump to remain in the White House, he will have to pull off a miracle in the remaining states that have yet to be called by a major network, and he will need to successfully navigate a recount process in Wisconsin (and perhaps elsewhere) better than any candidate in history, overturning tens of thousands of votes in his deficit. While we may face a few days or weeks of controversy and litigation, the signs point to Joe Biden becoming the next president of the United States. 

I expect that outcome to soon become clear, but first we must address the noise coming from the Trump campaign. What form do their legal challenges take in the key battlegrounds, and what exactly is at the center of their case? Further, what is the process and timeline for resolution? Here is the breakdown1:

Pennsylvania

At this stage, we see the most viable challenge to ballots would be the case in Pennsylvania, in which the Trump campaign is attempting to invalidate mail-in ballots received after 8:00 p.m. on Tuesday, Election Day. Even though ballots postmarked on Election Day are eligible to be received as late as this Friday at 5:00 p.m., this has been challenged, and it is possible that the US Supreme Court could take up this case. However, we see a few hurdles before the Supreme Court would consider taking up this case:

The Supreme Court would want to make sure that Pennsylvania is determinative to who wins the presidential election. If President Trump fails to turn Arizona back into his camp or cannot hold onto Georgia, the prevailing wisdom is that the Supreme Court would be hesitant to get involved in a state election issue that is not consequential.

The Supreme Court would also want to see if the counting of these contested ballots was determinative to the outcome in Pennsylvania. If Joe Biden wins Pennsylvania without the ballots in question, there would be no harm to remedy.

Absentee/ mail-in ballot deadline:

Nov. 3/Nov. 6

Vote counts/% reporting as of 11:30 a.m. EST on Nov. 5:

Trump: 3,224,422

Biden: 3,088,796

91% reporting

Rules for triggering a recount:

Any three qualified electors may request a recount.

Or, an automatic recount takes place if the margin of victory is 0.5% or less for statewide candidates or for ballot questions.

Status of recount lawsuits:

Trump campaign lawsuit

Michigan

Absentee/ mail-in ballot deadline:

Nov. 3/Nov. 3

Vote counts/% reporting as of 11:30 a.m. EST on Nov. 5:

Biden: 2,788,425

Trump: 2,639,035

98% reporting

Rules for triggering a recount:

A recount can be requested by a candidate in certain races. The candidate must allege that he or she is aggrieved on account of fraud or mistake in the canvass of the votes by the inspectors of election or the returns made by the inspectors of election, or by a board of county canvassers or the board of state canvassers.

The chairperson of a state political party may petition on behalf of a candidate when a state Senate race has a differential of 500 votes or less, or a state representative race has a differential of 200 votes or less.

Or, an automatic recount takes place if the margin of victory is 2,000 votes or less in a statewide primary or election

Status of recount lawsuits:

Trump campaign lawsuit

Wisconsin

Absentee/ mail-in ballot deadline:

Nov. 3/Nov. 3

Vote counts/% reporting as of 11:30 a.m. EST on Nov. 5:

Biden: 1,630,535

Trump: 1,610,001

98% reporting

Rules for triggering a recount:

A recount can be requested by any candidate voted for at any election who is an aggrieved party, or any elector who voted upon any referendum question at any election.

Status of recount lawsuits:

Trump campaign to request a recount

North Carolina

Absentee/ mail-in ballot deadline:

Nov. 3/Nov. 12

Vote counts/% reporting as of 11:30 a.m. EST on Nov. 5:

Trump: 2,732,120

Biden: 2,655,383

95% reporting

Rules for triggering a recount:

For statewide races, the margin of victory must be 0.5% of the votes cast in the ballot item, or 10,000 votes, whichever is less.

Status of recount lawsuits:

Final count expected on Nov. 12

Georgia

Absentee/ mail-in ballot deadline:

Nov. 3/Nov. 3

Vote counts/% reporting as of 11:30 a.m. EST on Nov. 5:

Trump: 2,432,928

Biden: 2,414,782

96% reporting

Rules for triggering a recount:

Where paper ballots are used and it appears there is a discrepancy or error, the superintendent may order a recount, or any candidate or political party may petition for one.

When results are within 0.5% of total votes cast for the office, a losing candidate may request a recount.

Status of recount lawsuits:

Trump campaign lawsuit

Arizona

Absentee/ mail-In ballot deadline:

Oct. 20/Nov. 3

Vote counts/% reporting as of 11:30 a.m. EST on Nov. 5:

Biden: 1,469,341

Trump: 1,400,951

86% reporting

Rules for triggering a lawsuit:

Can only be ordered by a county superior court.

Or, recounts are automatic if the margin of victory is less than or equal to the lesser of the following:

0.1% of the votes cast for both candidates or measures

In the case of an office to be filled by state electors or a statewide initiated or referred measure: 200 votes if more than 25,000 votes were cast; 50 votes if 25,000 or fewer votes were cast; 200 votes in the case of a measure

In the case of a member of the state legislature: 50 votes

Status of recount lawsuits:

Waiting on final count

Nevada

Absentee/ mail-In ballot deadline:

Oct. 19/Nov. 10

Vote counts/% reporting as of 11:30 a.m. EST on Nov. 5:

Biden: 588,252

Trump: 580,605

86% reporting

Rules for triggering a recount:

A recount can be requested by a candidate at any election, or any registered voter of the appropriate political subdivision.

Status of recount lawsuits:

Trump campaign joined an existing Republican lawsuit

1 Source for the vote totals: The New York Times and the National Conference of State Legislatures

Important information

Header image: Sean Locke / Stocksy

The opinions referenced above are those of the author as of Nov. 5, 2020. These comments should not be construed as recommendations, but as an illustration of broader themes. Forward-looking statements are not guarantees of future results. They involve risks, uncertainties and assumptions; there can be no assurance that actual results will not differ materially from expectations.

from Expert Investment Views: Invesco Blog https://www.blog.invesco.us.com/election-2020-biden-looks-poised-to-win/?utm_source=rss&utm_medium=rss&utm_campaign=election-2020-biden-looks-poised-to-win

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What could a divided government mean for US stocks?

As we wait for the votes to be counted, and perhaps recounted, in some key states, we’ve gotten some questions about the potential for a divided government and what it could mean for markets if the White House and Congress are split between parties.

Senate implications

Kristina Hooper: Chief Global Market Strategist: It appears all but certain that the Senate will remain Republican. This means that:

Government will likely be divided, regardless of who wins the presidency. The stock market has historically reacted positively to divided government, as my colleague Brian Levitt explains below. I expect stocks to rise in this environment. This is especially so given that markets had feared a Democratic sweep. For example, as of Oct. 28, 34% of companies in the S&P 500 Index that had reported earnings mentioned the election – with taxes being the government policy most discussed in conjunction with the election.1 There was real fear about what policies such as higher taxes and a higher minimum wage would do to businesses. Now that those policies are very unlikely even with a Biden win, I would expect stocks to continue with a relief rally.

The US is far less likely to get a large fiscal stimulus package, regardless of who is president. This suggests a slower economic recovery for the US, which would likely mean defensives and secular growth stocks could outperform.

If Biden wins the presidency, I think we will see a new era of fiscal conservatism ushered in despite being in the midst of an economic recovery, as proposed spending measures would require approval by Senate Republicans. This would be similar to what we saw during the Obama administration with sequestration while the US economy was still recovering from the global financial crisis. This suggests a slower, less robust economic recovery. With lower government spending and borrowing, I would expect to see lower 10-year Treasury yields.

If Trump wins the presidency, I would expect to see less of an emphasis on fiscal conservatism by Senate Republicans, although I don’t believe there will be anything close to profligate spending. This suggests more spending and borrowing (though not nearly what we would have expected with a Democratic sweep), and potentially higher 10-year Treasury yields.

Market implications

Brian Levitt: Global Market Strategist: Gracie Allen famously quipped, “This used to be a government of checks and balances.  Now it’s all checks and no balances.”  Allen’s observation, while funny, is not applicable to the 2020 US election. For all the uncertainty surrounding the outcome of the presidential election, the partisan control of the US Congress was never really in question.  For the next president, be it Donald Trump or Joe Biden, there will be balances on their power.  The prospect of outsized fiscal support, Allen’s joke notwithstanding, has diminished.

The markets have initially responded favorably to the perception that little will get done in the first two years of the next administration. Incessant hand wringing over the key issues and concerns over the prospects of higher taxes, a Green New Deal, changes to the Affordable Care Act and much more appears to have been for naught. The US system is inherently designed for incrementalism, and gradual progress is about the most either party can now wish for in the coming two years.

It is said that markets prefer divided government. The numbers bear that out, although I would argue that analysis is not all that statistically significant. Rather, the returns, in most instances, tend to be driven by a handful of notable years.

For example, as illustrated in the chart below, the second-best partisan control outcome for the S&P 500 Index has been when the Republicans have the presidency as well as the Senate, and the Democrats control the House of Representatives. It’s an interesting tidbit, especially for those hoping for a Trump victory, but is less impressive when we consider that combination has only happened during the early Reagan years and in 2019-2020.

As for a potential Biden victory: The combination of Democrats controlling the White House and House of Representatives, and the Republicans controlling the Senate hasn’t happened since 1885-1889, leaving it out of the time period of our analysis below. 

Partisan control: US large-cap equity returns

Source: Yale University/Shiller database, Strategas Research Partners. US large-cap equities represented by the S&P 500 Index. Chart is meant for illustrative purposes only and is not meant to depict or predict the performance of any investment strategy.  Indices cannot be purchased directly by investors.  Past performance does not guarantee future results. R = Republicans, D = Democrats.

The confluence of factors currently supporting equity and credit markets — improving economic conditions, stocks trading cheap compared to bonds,2 and accommodative monetary policy — holds true irrespective of the ultimate outcome of the presidential election. Paradoxically, divided government could set the stage for more-protracted market and business cycles. I believe the recovery will still likely play out in the coming years, but at a more modest pace than had there been additional fiscal support. While that might not be ideal for near-term growth in the real economy, we are also unlikely to experience the inflation pressures that have historically brought forward Federal Reserve tightening and hastened cycles. The economic recovery from 2011 to 2015 amid divided government may be an appropriate analogy. For what it is worth, markets performed quite well during that period, as represented in the chart above.

In short, I believe that investors, at a minimum, can rest easy knowing that meaningful change is probably not forthcoming. And remember, as Gracie Allen said, “The president of today is just the postage stamp of tomorrow.”

1 Source: FactSet Earnings Insight (Oct. 30).

2 Source: Bloomberg, L.P., Standard & Poor’s, as of Sept. 30, 2020. As represented by the difference between the earnings yield of the S&P 500 Index and the 10-year US Treasury rate.

Important information

Blog image credit: Cameron Whitman / Stocksy

The S&P 500® Index is an unmanaged index considered representative of the US stock market.

Diversification does not guarantee a profit or eliminate the risk of loss.

Past performance does not guarantee a profit or eliminate the risk of loss.

All investing involves risk, including the risk of loss.

The opinions referenced above are those of the authors as of Nov. 5, 2020. These comments should not be construed as recommendations, but as an illustration of broader themes. Forward-looking statements are not guarantees of future results. They involve risks, uncertainties and assumptions; there can be no assurance that actual results will not differ materially from expectations.

from Expert Investment Views: Invesco Blog https://www.blog.invesco.us.com/what-could-a-divided-government-mean-for-us-stocks/?utm_source=rss&utm_medium=rss&utm_campaign=what-could-a-divided-government-mean-for-us-stocks

[georgecmatthews]

Election 2020: What we know and what comes next

With ballots still being counted, the US presidential election remains undecided. Our experts discuss the next steps in the process and the potential market and economic implications.

Important information

Blog header image: Cristian Bortes/ EyeEm / Getty Opinions expressed are those of the speakers as of Nov. 4, 2020. These comments should not be construed as recommendations, but as an illustration of broader themes. Forward-looking statements are not guarantees of future results. They involve risks, uncertainties and assumptions; there can be no assurance that actual results will not differ materially from expectations.

from Expert Investment Views: Invesco Blog https://www.blog.invesco.us.com/election-2020-what-we-know-and-what-comes-next/?utm_source=rss&utm_medium=rss&utm_campaign=election-2020-what-we-know-and-what-comes-next

[georgecmatthews]

The counting continues as Trump and Biden pursue a path to victory

As of midnight EST, the 2020 presidential election remains up in the air. With ballots remaining to be counted in several states, an official result may not be known for some time. Below, our experts discuss the next steps in the political process, the policy issues that the markets will be watching, and two critical questions for investors to ask themselves right now.

The importance of the election process

Marty Flanagan, President and CEO, Invesco. While the US presidential election looked different this year, participating in the democratic process continues to be one of the most important responsibilities for all Americans. Participating in elections is one of the key freedoms for Americans, and it’s important that we allow the process to unfold, ensuring that the voice of the American people is heard.

The United States of America and the democratic process have endured times of uncertainty over our history, and I have complete confidence that we will do so again as the election results process continues.

The political process: What happens next?

Andy Blocker, Head of US Government Affairs: As of midnight EST on Nov. 3, the results of the election remain unclear. President Trump was able to hold onto many of the early reporting contested states that he won in 2016 – Florida, Texas, Georgia, and Ohio. And as of this hour, Arizona and North Carolina are still too close to call.

If President Trump is able to hold onto Arizona and North Carolina, it will be déjà vu all over again. This election will once again come down to the same rust belt states of Wisconsin, Michigan and Pennsylvania that determined the 2016 election. As expected, they have yet to count all of their mail-in votes and are not ready to be called for either candidate. We would expect to have final results from Wisconsin and Michigan on Wednesday, but Pennsylvania will not have final results until Friday, the deadline for receiving mail-in ballots in Pennsylvania. As a result, at the time of this writing, neither candidate has yet reached the 270-vote threshold in the Electoral College that is needed to win.

Four policy issues the markets will be watching

Kristina Hooper, Chief Global Market Strategist: Whoever prevails in this contested election will face significant challenges ahead. These are four areas I’ll be watching closely, due to their potential to impact markets and the economy:

COVID-19. Since the start of the pandemic, I’ve written about the importance of a three-pronged policy response to coronavirus: 1) public health policy to contain the virus, 2) monetary measures to ensure financial liquidity and functionality, and 3) fiscal support to contain the real economic damage. The Federal Reserve has provided massive monetary policy accommodation throughout the crisis — but what about the other two prongs? In terms of public health policy, Trump has suggested he might pursue a “herd immunity” strategy if there is another resurgence of the virus. In contrast, Biden has suggested that if recommended by medical experts, he would be open to implementing another widescale lockdown similar to the one experienced last spring. These approaches have the potential to significantly impact economic activity. In terms of fiscal support, I believe the next president needs to think of pandemic-related stimulus as akin to coupon payments on a bond. In other words, stimulus payments need to be adequate and at regular intervals in order for the economy to continue to be supported in the face of serious headwinds until an effective vaccine is developed and widely distributed.

China. We will be very focused on the next president’s plans for engaging with China. The Trump administration’s approach has created significant volatility in markets, and there is fear that a second term would mean even more unpredictable and aggressive moves against China. On the other hand, there is some uncertainty about what a Biden administration might mean for the US-China relationship. In our view, there are two main possibilities: One is that a Biden presidency would hit the “reset” button on relations with China, while another is that Biden would continue to be aggressive with China, but in a more measured and multilateral way.

Taxes. If Biden prevails, markets will be monitoring the potential for taxes to increase. He has said he wants to raise taxes, but when? Clearly the economic recovery is still very fragile, so raising taxes next year could be problematic, in our view. On the other hand, markets did not seem deterred by October polls that projected a decisive Biden victory. I believe one critical reason is that a “Blue Wave” could very well mean a large stimulus package in 2021 — and in the final weeks of the campaign, that seemed to outweigh concerns about an increase in corporate taxes.

Infrastructure. This is one area that both candidates have said they would spend more on, but we haven’t gotten much in the way of details. I will be waiting for details from the next president on his infrastructure spending plan: the amount he plans to spend, how it will be financed, and perhaps even when it might be implemented. In the 1930s, government spending on infrastructure was used as a way to fight unemployment and put people back to work, and it was successful in reducing unemployment and helping the economy. Might the same be true going forward?

We have to recognize that market volatility is what we get when there is policy uncertainty, but we can’t let it shake us as we are experiencing this uncertainty against a backdrop of massive monetary policy accommodation, which has helped support stocks throughout the pandemic. While we work through the political and legal processes to determine the winner, I believe it is important to remain well diversified and stay the course — and of course to be on the outlook for opportunities if stocks experience any heavy bouts of downward volatility.

Two critical question for investors

Brian Levitt, Global Market Strategist: It’s officially the moment that many investors expected might occur. The outcome of the election is unknown and the counting may take some time.

It is said that the equity market and those who invest in it don’t like uncertainty, particularly policy uncertainty.  As a result, the potential for near-term bouts of equity market volatility may be elevated. Critically however, the current political uncertainty is unlikely to change the trajectory of the economy and markets over the next years, in my view.

Providing the obligatory historical perspective of contested US elections is challenging. After all, the grand experiment is only 245 years old, and the 1876 election between Rutherford B. Hayes and Samuel Tilden may be of little significance to current investors. For what it’s worth, US large-cap equities fell 18% between the election of November 1876 and Hayes’ inauguration in March 1877, only to subsequently climb by 160% over his single term as president.1

In this century, the Nov. 7, 2000, election between George W. Bush and Al Gore didn’t have a victor declared until Dec. 13, 2000, when the US Supreme Court effectively ended the recount in Florida. The S&P 500 Index was down 4.9% between election day and the Supreme Court decision over a month later.2 Gold was up 3.9% over the same time frame, and the 10-year US Treasury rate fell 85 basis points from 5.85% to 5.00%.3 That’s not a great outcome but not a disaster either.

Notably, average market volatility in the 25 trading days between the 2000 election and the official result did not rise to the levels reached multiple times during the elongated business and market cycles of  2009-2019.4 In short, we have been through a lot of events in recent years that rattled markets more than the delayed election result of Bush v. Gore (see chart below). This includes, but is not limited to, the European debt crisis, the Chinese currency devaluation, the many shifts in US Federal Reserve policy, and the US-China trade war, not to mention the COVID-19 outbreak, which ultimately concluded the business cycle.

Source: Bloomberg, Chicago Board Options Exchange. The VIX Index is a financial benchmark designed to be an up-to-the-minute market estimate of the expected volatility of the S&P 500 Index and is calculated by using the midpoint of real-time S&P 500 Index (SPX) option bid/ask quotes.

In my view, when assessing the impact of specific events on the financial markets, investors should always ask themselves two primary questions:

Does the event change the trajectory of the world’s major economies over the next years?

Has monetary policy reserved course and/or does the event change the direction of monetary policy over the next years?

Seen from that lens, it is not surprising that the markets experienced greater volatility from the events listed above — the European Central Bank inexplicably raising rates in 2011, the US Federal Reserve raising rates in 2015, and an evolving and uncertain trade war between the world’s two largest economies in 2018 — than it did during Bush v. Gore. Election outcomes, as well as regional events (such as the Syrian Civil War), natural disasters (such as the hurricanes in Puerto Rico and Houston), massive protests and civil strife (such as Ferguson, Baltimore, Portland, and Kenosha), tend to not have the same impact on financial markets. This is because elections, regional events, natural disasters, and protests, while disconcerting, tend to not change the trajectory of the national or global economy nor of monetary policy.

In my view, the trajectory of the US economy in the next few years will be determined by the ability to compress COVID cases and re-engage in more segments of the US service economy. Plain and simple. Admittedly, the next president and his administration could hasten the US economic recovery through the right policy mix. Nonetheless, I believe that betting against that recovery over the next couple of years, irrespective of the ultimate outcome of the 2020 election, is akin to betting against medicine, science and human ingenuity. In addition, the Federal Reserve has telegraphed easy monetary policy conditions for at least the better part of the next presidential term.

As we stress over the outcome of the election and refresh foxnews.com or msnbc.com for the 50th time each day, remember there is a confluence of factors that I expect to favor stocks: The US economy is recovering and may continue to recover from a very depressed state. Stocks are cheap compared to bonds. 5 Cash yields little6 and the Fed intends to inflate away 2% of the value of that cash each year. In short, I see few alternatives to equities for investors seeking growth. Those factors are expected to stay the same, regardless of who is taking the oath of office in January.

Therefore, I’ll spend this unsettling time focusing on my two primary questions, rather than on the breaking news from the 24-hour news stations.   

1 Source: Yale, Robert Shiller database

2 Source: Bloomberg, Standard & Poor’s

3 Source: Bloomberg. The gold spot price is quoted as US dollars per troy ounce.

4 Source: Bloomberg

5 Source: Bloomberg, Standard & Poor’s, as of 9/30/20. As represented by the difference between the earnings yield of the S&P 500 Index and the 10-year US Treasury rate.

6 Source: Bankrate.com, as of 9/30/20

Important information

Blog image credit: Roibu / Getty

Diversification does not guarantee a profit or eliminate the risk of loss.

Past performance does not guarantee a profit or eliminate the risk of loss.

The opinions referenced above are those of the authors as of Nov. 3, 2020. These comments should not be construed as recommendations, but as an illustration of broader themes. Forward-looking statements are not guarantees of future results. They involve risks, uncertainties and assumptions; there can be no assurance that actual results will not differ materially from expectations.

from Expert Investment Views: Invesco Blog https://www.blog.invesco.us.com/the-counting-continues-as-trump-and-biden-pursue-a-path-to-victory/?utm_source=rss&utm_medium=rss&utm_campaign=the-counting-continues-as-trump-and-biden-pursue-a-path-to-victory

[georgecmatthews]

It’s Election Day, and the Senate is definitely in play

A year ago, anyone who looked at the map of Senate seats up in 2020 would have concluded that Democrats had a difficult path back to the majority. Fast forward a year and the persistent lead of former Vice President Joe Biden over President Donald Trump, along with a gusher of campaign cash for Democratic candidates, suddenly has Republicans playing defense in usually reliable red states.

The current split in the Senate is 53 Republicans to 45 Democrats along with two Independent senators, Angus King from Maine and Bernie Sanders from Vermont, who caucus with Democrats. Based on that ratio, Democrats need a net gain of three seats if Biden wins or a net gain of four if President Trump is re-elected.

Of the seats Democrats are defending, two are considered most likely to flip to the Republicans: Doug Jones of Alabama and Gary Peters of Michigan. On the Republican side, there are nine seats considered most likely to flip: Martha McSally in Arizona, Cory Gardner in Colorado, Joni Ernst in Iowa, Susan Collins in Maine, Steve Daines in Montana, Thom Tillis in North Carolina, and Lindsey Graham in South Carolina.

Separately, David Perdue finds himself in a neck-and-neck race with Democratic challenger Jon Ossoff in Georgia. Perdue’s tenuous situation is partially due to being overshadowed by an intense special election for the second Senate seat that is playing out in a “jungle primary” between Republicans Kelly Loeffler and Doug Collins and Democrats Raphael Warnock and Matt Lieberman. Both races must result in one candidate reaching a 50% threshold or face a January runoff.

The good news for Democrats is that there are more Republican seats in play than Democratic seats. The bad news for Democrats is that many of those seats are in usually reliable red states.

Today, on Election Day, let us consider the factors that give Democratic challengers hope and Republican incumbents cause for concern.

Money

It’s long been said that money is the mother’s milk of politics, and that could not be more accurate than this year. The Democratic Senatorial Campaign Committee (DSCC) has raised more than $244 million in this cycle compared to $148 million in 2018. The National Republican Senatorial Committee (NRSC) has raised a similar amount this year, bringing in nearly $220 million – about $70 million more than they raised in 2018. What does all this money do? It allows both parties to make their case on television, a lot. The NRSC and affiliated Republican groups have spent over $257 million on television spots across 10 battleground states. The DSCC and affiliated groups have, similarly, spent $256 million across the same 10 states.

Source: Federal Election Commission, as of Oct. 23, 2020

Individual candidates are raising eye-popping sums as well, changing the shape of races once thought safe. Take South Carolina, for example, in a race that six months ago, no one thought would be close. Democratic challenger Jaime Harrison has pulled within striking distance of longtime incumbent Senator Lindsey Graham. As of Sept. 30, Harrison had raised $86.8 million to Graham’s $59.4 million. In a dark red state that President Trump carried easily in 2016, Harrison has made a race of it. In fact, he shattered a three-month, $38 million fundraising record previously held by Beto O’Rourke in 2018 by raising an eye-popping $57 million in the third quarter of 2020.

In neighboring North Carolina, Army veteran and former state legislator Cal Cunningham has raised $43.4 million, outpacing Senator Thom Tillis, who has raised less than half of that. Outside prognosticators have this race as a toss-up or leaning Democratic, but late revelations of an extramarital affair may damage some of Cunningham’s standing with voters.

Yet more money does not always equal electoral success. Senator Doug Jones in Alabama has raised nearly $25 million, three times the amount raised by his challenger, former Auburn football coach Tommy Tuberville. Yet, Jones continues to trail Tuberville by double digits in recent polls.

This pattern of Democrats significantly outraising Republicans is playing out in battlegrounds across the country. The notable exception is in Michigan, where Senator Gary Peters is in a close race with businessman and Army veteran John James. Peters has raised $35.6 million to James’ $33.9 million. While outside observers rate this race as leaning Democratic, it is the race that keeps Democratic strategists up at night, and a loss here could complicate the Democrats’ path to the majority.

Three potential Senate scenarios

1. Blue Wave

The dream scenario for Democrats is a blue wave that washes over the nation, carries Biden to the White House and gives him a majority in both the Senate and House of Representatives. The key questions in this scenario are how large a Senate majority and will it be enough to allow Biden to enact some of his more ambitious agenda items.

It seems unlikely that Democrats would achieve a “supermajority” of 60 or more votes necessary to break any filibuster and, if past is prologue, then Minority Leader Mitch McConnell (R-Kentucky) will use all the tools at his disposal to try to stop the Democratic agenda.

This concern gives rise to talk of ending the filibuster, the procedure that gives any individual senator the ability to prevent the Senate from moving forward on legislation. While this seems like a simple thing for a new majority to do at the beginning of the Congress, it is not easy procedurally or politically. Eliminating the filibuster by changing the rules would require two-thirds of senators to be present and voting, or 67 votes if all 100 senators are present and voting. It is unlikely that any senator in the minority would vote to give away their leverage over the Senate’s agenda. Democrats could choose to modify the filibuster instead by banning it on certain proceedings, as was done for judicial nominations, or make it more difficult to use by requiring senators to filibuster in person.

For example, Democrats could choose to eliminate the filibuster on “motions to proceed,” which are the motions that allow the Senate to move to debate. This would preserve a senator’s right to object to passage of the underlying matter without preventing the Senate from considering it at all. A new Senate majority could limit the time for debate on certain kinds of legislation as has been done for the annual budget resolution, to prevent arms sales to foreign governments or to ratify trade agreements. Because of the two-thirds requirement to change the standing rules, the new majority would have to rely on creating a new “precedent,” which can be done by a simple majority. This process involves having the Senate’s presiding officer rule on a point of order, then appealing the ruling and voting to overturn it. This vote requires only a simple majority. Former Majority Leader Harry Reid (D-Nevada) used this process in 2013 for certain judicial nominations. Majority Leader Mitch McConnell (R-Kentucky) used the same process in 2017 for Supreme Court nominations.

The Senate could also return to the form of the filibuster abandoned in the 1970s. Before that, senators who objected to legislation had to do so in person on the Senate floor. This was because the Senate considered bills in sequence and could not move on to other business until the current matter had been disposed of. A change in Senate procedure proposed by then-Majority Whip Robert Byrd (D-West Virginia) allowed the majority leader under unanimous consent, or with agreement of the minority leader, to set aside the pending issue and move on to other business. Changing it back would preserve the filibuster but force senators to be particular about when they object.

Politically, there are Democrats who have expressed either misgivings with or outright objection to changing the rule. Senator Joe Manchin (D-West Virginia), for example, has come out against changing the filibuster. Senators John Tester (D-Montana) and Angus King (D-Maine) have both suggested that modification is preferable. The conventional wisdom is that if Democrats take the Senate, incoming Majority Leader Chuck Schumer (D-New York) will wait to see how opposition to Biden’s agenda materializes before making any significant changes to Senate rules.

An alternative would be for Democrats to use a process under the Budget Control Act of 1974 called “reconciliation.” It expedites the passage of certain budget-related items without the threat of the filibuster. For reconciliation to be used, both the House and Senate would have to pass a concurrent budget resolution (not an easy task these days). This process has been used in the past, including for tax cuts passed during the George W. Bush and Trump administrations and – contrary to popular belief – only to make a series of discrete budgetary changes to Obamacare (not to pass the actual law). In fact, progressive groups have already called for Congress to use this process to enact climate change legislation.

2. Republicans Hold Senate

A second scenario is a Biden victory and Republicans retaining the Senate. In this case, the Senate will continue to be the place where Democratic agenda items go to die. Neither the Green New Deal (nor any form of major climate change legislation) nor Medicare for All will be considered, let alone pass in a 117th Congress controlled by Senate Republicans. There could be agreement on an infrastructure package, but even that would be fraught with disagreements of the size, focus, and how to pay for it.

3. Status Quo

A third scenario is status quo — Trump is re-elected, Republicans retain control of the Senate, and Democrats retain control of the House of Representatives. In this scenario, there may be opportunities for progress on COVID-19 relief and infrastructure spending. However, look for many of the same pitched battles on contentious issues like health care, more confirmation of conservative federal judges (appointment by the president and confirmation by the Republican Senate), and President Trump turning to executive orders and regulatory fiat to overcome the overall stalemate in Congress.

Regardless of who wins the presidency, the fortunes of the next administration rest solely in the hands of the Senate.

Important information

Blog header image: ElevenPhotographs / Unsplash

The opinions referenced above are those of the authors as of Oct. 27, 2020. These comments should not be construed as recommendations, but as an illustration of broader themes. Forward-looking statements are not guarantees of future results. They involve risks, uncertainties and assumptions; there can be no assurance that actual results will not differ materially from expectations.

from Expert Investment Views: Invesco Blog https://www.blog.invesco.us.com/its-election-day-and-the-senate-is-definitely-in-play/?utm_source=rss&utm_medium=rss&utm_campaign=its-election-day-and-the-senate-is-definitely-in-play

[georgecmatthews]

Should investors spend more time considering the upside risks?

Since the dark days of March and April, I have remained steadfast in looking across the valley to better times ahead, and this time is no exception. Regardless of near-term turbulence, I continue to favor portfolio positioning for optimistic, long-term outcomes by emphasizing the “recovery” trade and embracing cyclicality. Fortunately, key barometers of global growth have validated this positive outlook.

Each month, the JPMorgan Global Manufacturing Purchasing Managers Index (PMI) takes the first pulse of business conditions and executive sentiment across the worldwide manufacturing sector. Not only has the PMI enjoyed a literal V-shaped recovery, but it has achieved levels of optimism higher than those immediately preceding the Great Lockdown (Figure 1).

Similarly, South Korea is the first major exporting nation to release monthly trade data, providing an early gauge of international commerce. Improving planetary demand for chips, computers and cars are supporting shipments from this high-tech, industrialized and global growth-sensitive economy. Indeed, South Korean exports are growing faster now than they were before the pandemic (Figure 1).

Figure 1. Key barometers of global growth have validated the ‘recovery’ trade

Source: Bloomberg L.P., Invesco, 10/28/20. Note: Diffusion indices have the properties of leading indicators, and are convenient summary measures showing the prevailing direction and scope of change. Shaded areas denote global manufacturing contractions.

In North America, US retail sales have rebounded to a high single-digit pace unseen since the aftermath of the Great Recession and Global Financial Crisis of 2008-2009. Clearly, fading government support, delays over further stimulus payments, and still over 700,000 people filing for initial jobless claims each week haven’t stopped American consumers from spending.

Downside risks

Have my views changed given the recent risk-off tone in markets? No. But responsible stewards of capital must contemplate the downside risks. In order to derail the cyclical advance, I believe something devastating would have to happen.

True, the rise of new COVID-19 cases has been weighing on risk assets, including the overall stock market. In response to increasing infection rates, Germany, France and Canada have renewed lockdowns and social restrictions to curb the spread of the coronavirus.

Despite virus-related concerns, however, S&P 500 industries that previously profited from the shutdown (i.e., Biotechnology, Hypermarket & Super Center, Interactive Home Entertainment, Internet & Direct Marketing Retail, and Internet Service & Infrastructure stocks) have been underperforming those that stand to gain from reopening (i.e., Airline, Casino & Gaming, Hotel, Resort & Cruiseline, and Restaurant stocks) since early July. In other words, when the dark blue area declines, it means the “reopening” beneficiaries outperformed the “shutdown” beneficiaries (Figure 2).

Perhaps these leading indicators of potential economic activity are sensing another peak in the case count, as they did back in June/July and February/March? If so, I would prefer to take a cue from such intra-stock market trends and stick to the broader “recovery” trade.

Figure 2. Despite virus-related concerns, the US ‘reopening’ trade has been outperforming the ‘shutdown’ trade since early July

Source: Bloomberg L.P., Invesco, 10/28/20. Notes: The shutdown trade is based on an equally-weighted basket of the official Biotechnology, Hypermarket & Super Center, Interactive Home Entertainment, Internet & Direct Marketing Retail and Internet Service & Infrastructure Sub-Industry components of the S&P 500 Index. The reopening trade is based on an equally-weighted basket of the official Airline, Casino & Gaming, Hotel, Resort & Cruiseline and Restaurant Sub-Industry components of the S&P 500 Index. An investment cannot be made in an index. Past performance does not guarantee future results.

Upside risks

Is it possible to spend too much time worrying about the downside risks and not enough time considering the upside risks? For this exercise, let’s explore some “what if” scenarios:

What if potential treatments and/or vaccines for the virus materialize, and meaningfully alter trends in the case count? According to CNBC, the US Food and Drug Administration (FDA) has already approved Gilead Science’s remdesivir as the first COVID-19 treatment.1

Granted, there’s a stalemate in Washington over the next round of fiscal stimulus, but I see this as an ebbing tailwind for now rather than a gathering headwind. What if a “blue wave” materializes on Election Day, but delivers another round of significant fiscal stimulus as opposed to higher taxes? Recall that Obama extended the Bush-era tax cuts a few times in the recovery stage of that business cycle.

What if volatility were to decrease and stocks were to increase following the election, helped by typical year-end seasonal patterns (read: the “January” effect) and election-year tailwinds? In spite of all the fears about persistent volatility around the election, history shows that the Chicago Board Options Exchange (CBOE) Volatility Index (VIX) has fallen the most in November (during all calendar years since 1986) and even more in US presidential election years (Figure 3).

Figure 3. Historically, volatility has fallen the most in November during US presidential election years

Source: Bloomberg L.P., Invesco, 10/28/20. An investment cannot be made in an index. Past performance does not guarantee future results.

As a result, I’m inclined to interpret the recent shakeout as a temporary risk-shedding event, as opposed to a sinister change of trend, and I continue to treat such short-term pullbacks as buying opportunities for stocks. In fact, this technical indicator suggests S&P 500 industry breadth or participation has essentially fallen to washout levels (Figure 4), and a playable rally may ensue.

Figure 4. US stock market breadth has fallen to washout levels, and a playable rally may ensue

Source: Bloomberg L.P., Invesco, 10/28/20. Notes: Price returns. 50 DMA = 50 day moving average. The magenta ellipses highlight past instances when extremely weak industry breadth/participation coincided with major lows in the US stock market. An investment cannot be made in an index. Past performance does not guarantee future results.

Stick to cyclical growth

Within the economy-sensitive sectors of the stock market, the real debate still centers on “growth” cyclicals (e.g., Information Technology, Consumer Discretionary) versus “deep value” cyclicals (e.g., Financials, Energy).

I’m watching the yield curve or spread between 10- and 2-year government bond yields for signs of a persistent rotation into deep value cyclicals. True, the yield curve has steepened a bit recently, but has failed to break out above 0.7% so far in the economic recovery.2

From my lens, Financial and Technology stocks seem unconvinced the economy’s about to rapidly shift into sustainably higher gears. Until it does, I’m staying committed to cyclical growth. (No, the bottom of the chart doesn’t equal technical support.)

Figure 5. Technology was ground zero for the recent sell-off, but I’m unconvinced the economy’s about to rapidly shift into sustainably higher gears

Source: Bloomberg L.P., Invesco, 10/28/20. Notes: The Financials and Information Technology sector indices are sub-components of the S&P 500 Index, and the Value and Growth indices are sub-components of the S&P 500 Index (see definitions for all below). An investment cannot be made in an index. Past performance does not guarantee future results.

For price-conscious investors, it might be more palatable — and maybe just as effective — to consider participating in this prolonged, low-altitude recovery and cyclical advance through the Industrial and Material sectors.

Footnotes

1 Source: CNBC, 10/22/20.

2 Source: FRED, 10/28/20.

Definitions

The CBOE VIX or investor “fear” gauge is a real-time index that measures expectations for US stock market volatility over the coming 30 days.

The S&P 500 Index is a capitalization-weighted measure of 500 stocks representing leading companies across the major industries of the US economy.

The S&P 500 Financials Index is a capitalization-weighted measure of large-cap stocks within the financial sector of the US economy. It’s a sub-component of the broader S&P 500 Index.

The S&P 500 Information Technology Index is a capitalization-weighted measure of large-cap stocks within the tech sector of the US economy. It’s a sub-component of the broader S&P 500 Index.

The S&P 500 Value Index measures the performance of US large-cap value stocks as defined by companies with lower price-to-book ratios.

The S&P 500 Growth Index measures the performance of US large-cap growth stocks as defined by companies with higher forecasted earnings growth rates.

Important Information

Blog Header Image: Lucas Ottone / Stocksy

All investing involves risk, including risk of loss.

In general, stock values fluctuate, sometimes widely, in response to activities specific to the company as well as general market, economic and political conditions.

The opinions referenced above are those of the author as of Nov. 2, 2020. These comments should not be construed as recommendations, but as an illustration of broader themes. Forward-looking statements are not guarantees of future results. They involve risks, uncertainties and assumptions; there can be no assurance that actual results will not differ materially from expectations. This does not constitute a recommendation of any investment strategy or product for a particular investor. The opinions expressed are those of the authors, are based on current market conditions and are subject to change without notice. These opinions may differ from those of other Invesco investment professionals.

from Expert Investment Views: Invesco Blog https://www.blog.invesco.us.com/should-investors-spend-more-time-considering-the-upside-risks/?utm_source=rss&utm_medium=rss&utm_campaign=should-investors-spend-more-time-considering-the-upside-risks

[georgecmatthews]

Fears of unrest rise on the eve of Election Day

Well, last week was in fact a Pepto Bismol kind of week, just as I had expected. No fiscal stimulus in the US, COVID-19 cases on the rise in Europe and the US, and growing concerns about the US presidential election. It’s no wonder that the VIX volatility index has risen dramatically in the last few weeks, from 25 on Oct. 9 to 38 on Oct. 30.1 As I’ve said before, today’s election concerns aren’t your usual run-of-the-mill worries like we saw in past election cycles. Past questions focused on issues such as “What happens to stocks if corporate taxes go up?” This time around, it is “What happens if there is a contested election?” and “What happens if there is civil unrest?”

A history of contested elections

Contested presidential elections have happened before. Not just in 2000, but in 1876. That was the contest between Rutherford B. Hayes, the Republican nominee, and Samuel Tilden, the Democratic nominee.2 Tilden won the popular vote and led with more electoral votes (185-184), but there was a dispute over four states’ electoral votes. In three of those states (Florida, Louisiana and South Carolina), Tilden appeared to win the popular vote, but there were reports of widespread electoral fraud and voter intimidation against Hayes supporters. One fraudulent tactic was to confuse illiterate voters into supporting Tilden by using revered Republican President Abraham Lincoln’s picture next to Tilden’s name. As such, those three states disqualified Democratic votes — but this was not without controversy. For example, the state of Florida produced two slates of electors — one slate for Tilden, one slate for Hayes. In Oregon, Hayes won the popular vote and therefore the state’s electoral votes, but one of his electors in that state was disputed, as the Democratic governor removed him for violating Constitutional requirements and replaced him with a Democratic elector. In the midst of this dispute, a protester fired a rifle into the home of the Republican candidate Hayes.

After competing slates of electors for these states were sent to Congress, Congress attempted to resolve this election dispute between Tilden and Hayes by creating an “electoral commission” comprised of five Supreme Court justices, five representatives and five senators. The political climate became very tense, leading General William Sherman to order troops to Washington, D.C., to maintain order. Militant Democrats warned of blood in the streets if Tilden did not become president, and headlines screamed, “Tilden or War!”

The electoral commission decided in February 1877 that Rutherford B. Hayes would be the next president. However, Democrats were incensed by the decision and attempted a filibuster to prevent Congress from accepting the commission’s decision and prevent Hayes’ inauguration. The standoff finally led to the Compromise of 1877, an attempt to placate Tilden supporters so that they would support Hayes’ presidency. In return for accepting the electoral commission’s decision to name him as the next president, Hayes agreed to the withdrawal of federal troops from the South, which in effect ended Reconstruction. However, the situation was so politically charged that there was an attempted assassination of Hayes during the inauguration festivities. Despite that troubling start, Hayes served one term as president and, despite continued grumbling about his legitimacy from Tilden supporters, presided over a relatively peaceful period in the nation’s history.

That particular scenario won’t happen again because soon after the dispute, Congress passed the Electoral Count Act of 1887. While flawed, it provides more specific guidance on how to manage a dispute over electoral votes. We of course experienced another contested election in 2000. It was a very civilized affair in comparison to 1876. In a little over a month after election day, the Supreme Court decided the victor, George W. Bush, and no compromise had to be offered to Democrats to placate them.

Concerns about civil unrest ahead

Now there is concern that there could be another contested election, but that it might not be as civilized and polite as 2000 — and in fact might lead to civil unrest. I believe there is some validity to these concerns. After all, last week Wal-Mart was so concerned about the potential for civil unrest that it made the decision to temporarily remove guns and ammunition from store aisles in order to prevent the theft of these weapons if stores are looted, although it reversed the decision the next day.3 And on Friday, the Biden campaign cancelled a rally in Texas because Trump supporters surrounded the Biden bus, allegedly ramming a Biden-supporting car traveling alongside the bus and holding up traffic.4 In addition, businesses in a number of cities are boarding up windows in preparation for civil unrest.5  Finally, it is expected that the federal government will re-install a “non-scalable fence” around the White House today, in preparation for the possibility of unrest (the fence had been temporarily installed this summer during Black Lives Matter protests, but had since been removed).6  

Well, it might be both sad and reassuring to know there is a long history of American civil unrest around elections. For example, in the 1850s, the Know-Nothing Party supported the use of violence in order to prevent immigrants from voting. This was not a fringe movement — this was a powerful political party, with members holding 22% of the seats in Congress in 1854.7 In Baltimore, there was a bloody clash between the Know-Nothing Party and the Democratic Party that resulted in the deaths of eight people. In 1855, there was an even bloodier episode of civil unrest in which the Know-Nothing Party was involved, resulting in the killings of 22 people, most of whom were German and Irish immigrants.8 

Arguably the biggest incidence of civil unrest was the Civil War, which got its start in 1860 with the refusal of southern states in the US to accept the results of the presidential election. But it didn’t stop there. However, historically we have seen a disconnect between civil unrest and the stock market. I look to 1968 as a guide as it was a period of very serious civil unrest. As is the case today, there were deep divisions in the US around critical issues such as the Vietnam War and civil rights in the 1960s. Much of it came to a head in 1968, a year when opposition to the Vietnam War became so powerful that incumbent President Lyndon Johnson made the surprise decision to not seek another presidential term. This was a year when civil rights icon Martin Luther King was assassinated, as was Democratic presidential candidate Robert F. Kennedy. There was rioting in many cities for months, including at the Democratic National Convention. And yet the stock market was largely divorced from this civil unrest and actually finished the year in positive territory.9

We have to recognize that America has a long history of violence surrounding elections, which has the potential to rear its ugly head again, especially in a period of heightened tensions and a pandemic. The good news is that, despite this history, democracy in America has survived. And while many are concerned about controversy and unrest surrounding the 2020 US election, I believe that the checks and balances we have in place will lead us through. From an investment perspective, I expect things like innovation and business fundamentals to drive the stock market in the long term, despite any shorter-term volatility that may arise.

Looking ahead

So what is ahead for this week? Likely more investor indigestion, and not just from the US presidential election. We now know more definitively than ever that fiscal help is not on the way in the US in the near term. But what’s worse is that the second wave of COVID-19 has arrived, and it’s bad enough to warrant significant lockdowns in Europe.

Over the weekend, Prime Minister Boris Johnson announced a second lockdown in the UK in an attempt to control an alarming rise in COVID-19 infections. Johnson said that England will close all nonessential businesses for the next four weeks — although it will keep schools open. This means people must stay at home except for the purposes of education, medical treatment, or grocery shopping. Since then, British citizens have been put on notice that the lockdown may need to last more than a month. Keep in mind that not too long ago, the British government was incentivizing citizens to eat out with government subsidies; now it has closed all pubs and restaurants for dining, and they can only provide takeout or delivery.10 What we learned in the spring is that Europe’s present can be the US’s future in just a few weeks, and the prospect of a lockdown in the US could really rattle investors and send stocks down even further.

Heading toward Election Day on Tuesday — and the potentially tumultuous days after — I favor staying the course and maintaining a long-term asset allocation. If you’re sitting on cash that you are looking to deploy, you may find some attractive opportunities this week and possibly in the weeks ahead. And finally, stay calm — I plan to have some wine and chocolate on hand alongside my Pepto Bismol.

1 Source: Bloomberg, L.P. The CBOE Volatility Index® (VIX®) is a key measure of market expectations of near-term volatility conveyed by S&P 500 stock index option prices. VIX is the ticker symbol for the Chicago Board Options Exchange (CBOE) Volatility Index, which shows the market’s expectation of 30-day volatility.

2 Sources for Hayes/Tilden history include: BBC News, “Flashback to 1876: History repeats itself,” Dec. 12, 2000; Michael Benedict, “Southern Democrats in the Crisis of 1876-1877: A Reconsideration of Reunion and Reaction,” Journal of Southern History, 1980; Columbian College of Arts & Sciences, The George Washington University, History News Network, “The List of Presidential Assassination Attempts Is Shockingly Longer than Anyone Thought.” July 19, 2015; Harpweek, “Finding precedent: Hayes vs. Tilden, the Electoral College controversy of 1876-1877”

3 Source: CNBC.com, “Walmart pulls guns, ammo off sales floors because of ‘civil unrest’ in some areas, but will still sell them,” Oct. 29, 2020

4 Source: click2houston.com, “Video: Vehicles flying Trump flags surround Biden campaign bus on Texas freeway,” Nov. 1, 2020

5 Source: Fox Business, “Businesses across nation board up windows ahead of potential Election Day unrest,” Nov. 1, 2020

6 Source: Daily Mail, “Fortress White House: Crews will begin building ‘non-scalable fence’ around the complex tomorrow as Secret Service prepares for potential unrest,” Nov. 2, 2020

7 Source: theconversation.com, “Violence has long been a feature of American elections,” Nov. 7, 2016

8 Source: Scientific American, “Violence Has Long Been a Feature of American Elections,” Nov. 7, 2016

9 Source: Bloomberg, L.P.

10 Source: CNBC.com, “Prime Minister Boris Johnson imposes stay-at-home order in England as coronavirus cases surge,” Oct. 31, 2020

Important information

Blog header image: JEREMY PAWLOWSKI / Stocksy

All investing involves risk, including the risk of loss.

The opinions referenced above are those of the author as of Nov. 2, 2020. These comments should not be construed as recommendations, but as an illustration of broader themes. Forward-looking statements are not guarantees of future results. They involve risks, uncertainties and assumptions; there can be no assurance that actual results will not differ materially from expectations.

from Expert Investment Views: Invesco Blog https://www.blog.invesco.us.com/fears-of-unrest-rise-on-the-eve-of-election-day/?utm_source=rss&utm_medium=rss&utm_campaign=fears-of-unrest-rise-on-the-eve-of-election-day

[georgecmatthews]

Election Night 2020: Champagne and cheers, or anxiety and jeers?

In what many voters feel like has been a never-ending presidential campaign cycle, Nov. 3 is finally close enough to touch. But will Election Day 2020 provide closure for a restless electorate?

As President Donald Trump and former Vice President Joe Biden barnstorm a handful of battleground states, the intricacies and mechanics of how a candidate becomes president are coming into light, and all eyes are on the Electoral College. Consisting of 538 electors representing all 50 states and Washington D.C., and roughly allocated by population, the Electoral College, not the popular vote, ultimately decides US presidential elections. To win, a candidate must secure an absolute majority – 270 or more electoral votes. Since most states – with the exceptions of Nebraska and Maine – assign electoral votes on a winner-take-all model based on statewide vote totals, a small percentage of voters in key states can play a deciding role in the overall election outcome. Former Secretary of State Hillary Clinton learned this painful lesson when she captured the popular vote but fell short of the electoral vote four years ago.

With so few states actually in play (in our view, this include Florida, Michigan, Pennsylvania, Georgia, Ohio, Wisconsin, Arizona, Nevada, Minnesota, North Carolina, and New Hampshire), political experts have been taking a deeper look at chaos theories and “what if” scenarios. What if results are contested? Could there be recounts, lawsuits or both? Will state legislatures have to get involved?

Source: Invesco analysis

Political talking heads have focused on Bush v. Gore in 2000 as the precedent for presidential election chaos. That dispute, untimely decided by the Supreme Court, halted an ongoing recount and determined that President George W. Bush had won Florida by 537 votes. That victory meant that Bush won all 25 of Florida’s electors, giving him a total of 271 votes in the Electoral College and, with that narrow majority, the presidency.

Some experts have forecasted that several states in 2020 could see similar recount and courtroom drama leading all the way to the Supreme Court in deciding whether Trump wins a second term or Biden claims victory. Their predictions are based on the craziness of 2020: the pandemic, a record number of mail-in ballots, the polarization of America and President Trump’s characterization of the voting process.

However, famed Republican election lawyer Benjamin Ginsberg recently put the odds of the 2020 presidential election ending up in a legal battle that sprawls into January at just 1%, citing more signs pointing to a smooth transition than a repeat of 2000.1 Keep in mind that only three of the 57 previous presidential elections have been contested. 1

But is history relevant in modern politics? Here are several variables to watch for to determine if this election will be decided within hours, weeks or months of the polls closing.

Vote counting

Democrats have embraced vote-by-mail while President Trump has lambasted it as fraudulent, despite casting his own ballot by mail in past elections. History will take a very close look at the encouragement – and discouragement – of mail-in and absentee voting on the results of the election both in terms of the presidential outcome as well as the impact on down-ballot candidates.

Election Day and subsequent weeks could see voting result fluctuations as in-person votes are tabulated and mail-in and absentee ballots are counted. As of Oct. 21, the US Elections Project counted 84.7 million absentee ballots that had been requested and 44 million people who had already voted. We expect to see confusion on election night as both political parties and news outlets grapple with reporting in-person votes versus absentee or mail-in as different states have different rules on when votes can be counted. Also, there are questions as to when mail-in or absentee votes are valid.

Here are three different categories of how and when states can count early votes, and they will be important to understand the differences as the results come in:

Upon receipt. 22 state election authorities and the District of Columbia start counting when the ballot is received. Among this group, Arizona, Georgia, Minnesota and Nevada are considered the most pivotal for the presidential election and could foreshadow a good night for President Trump or former Vice President Biden. If Biden were to flip the red state of Georgia to blue and secure 16 electoral votes, it could prove be to be a tough road for Trump. Similarly, in 2016, Trump narrowly lost Minnesota – a state that has not voted for a Republican president since 1972. If the results look favorable for Trump there, it could not only put 16 critical electoral votes in his tally but foreshadow that the famous “Blue Wall” (Michigan, Wisconsin, and Minnesota) has crumbled. Arizona’s ability to count as the votes are received prior to Nov. 3 could permit some early forecasting on whether Trump recaptures the Grand Canyon State’s 11 electoral votes, or if Biden is well on his way to becoming the 46th president.

Before election day. 25 state election authorities can tabulate votes at a defined date by state law. Among this group, Florida, Iowa, Michigan, New Hampshire, North Carolina and Ohio are considered the most critical to election outcomes. But these states differ as to when counting is permitted. On one end there is Florida, which started its tabulation on Sept. 24, and on the other end is Michigan, which starts counting 10 hours before Election Day. The early tabulation will allow states to report out Nov. 3 numbers that could either spell doom and gloom or early moments of celebration for either party. In our view, President Trump’s path to victory will be severely truncated if he cannot match his 2016 victories in Florida, Ohio, Michigan and North Carolina. Similarly, any victory by Biden in these same states would be a sign of optimism for Democrats. The ability for these states to count early should remove weeks of suspense as they will have a head start on tabulating votes while also counting in-person voting, which is expected to lean Republican. Another important element to watch in Florida is that the state does not allow ballots to be counted if they are received after Election Day, which should reduce election result delays.

On election day. Four state election authorities can tabulate votes on the date of the election, with Wisconsin and Pennsylvania by far the most important to determining election outcomes. President Trump shocked the political establishment in 2016 when he won both states, and neither party is leaving anything on the table in 2020. Both Republicans and Democrats will be closely watching election night to see results in these battleground states. Wisconsin officials have said they expect to have their results completed the day after the election. The state has also permitted county clerks to verify signatures on the outside of the ballots early, which should reduce day-of vote counting (and suspense) and reduce the number of questionable ballots.

What does this all mean?

The ability for critical bellwether states to either tabulate ballots as they come in or on a certain date before Nov. 3 does provide some certainty that election results will come sooner rather than later. It is estimated that 40% to 50% of the projected 150 million votes could be cast by mail. Experts largely expect early voting to favor Democrats and Election Day in-person voting to favor Republicans. Depending on when states begin counting mail-in votes, and therefore which votes – mail-in or in person – are reported first, there could be several “blue or red shifts.” This could create the impression that one state is headed blue or red based on that state’s ballot counting requirements. The “blue and red” shifts may frustrate the candidates and create the appearance of “fraud” or gamesmanship, but they are simply part of the process that will allow the results of the election to be made public faster.

Electoral College

With only a handful of truly competitive states, the path to either candidate securing the 270 electoral votes needed for victory hinges on election returns in Florida, Michigan, Pennsylvania, Georgia, Ohio, Wisconsin, Arizona, Nevada, and Minnesota. Contested or uncertain results in any of these states, as occurred in Florida in 2000, could prevent either candidate from reaching the 270-vote threshold. President Trump and some experts have raised concerns that delays in finalizing election results could run into the Dec. 8 safe harbor deadline. This deadline, set by federal law, is the last day when states can appoint electors without interference from Congress.

Electors are set to cast their votes on Dec. 14. If a state’s results remain contested and without a clear winner past Dec. 8, there is no clear remedy. One option would be for the state’s legislature to name its own slate of electors regardless of the results of the statewide vote. In states where one party controls the legislature and a different party holds the governor’s office, this could result in competing slates of electors being sent to Congress. In either case, a state government overriding the popular vote could lead to claims of a “stolen election” and push the losing party to not accept the results. Despite the possibility of these worse case scenarios, it is important to note that no state legislature has ever appointed a slate of electors supporting a candidate who lost that state’s popular vote, and in our view, this remains unlikely in 2020.

State election rules and law

If election results in one or several states are in question this November, the vast majority of states have basic election safeguards already in place to create an orderly process to determine the legal electoral outcome.

As of October 2020, 20 states have a statutory provision allowing for an automatic recount of votes if the margin between the top two candidates is within certain parameters. Forty-three states have a statutory provision allowing for a requested recount of votes. In our view, it is highly unlikely that statutory requirements for a mandatory or requested recount will be triggered since it is improbable that those states’ results will be so narrow and are relevant to the Electoral College outcome that the country will see widespread vote recanvassing. The biggest hurdle for a contested election would be a few battleground states that have protracted election recounts that could see their results questioned.

Conclusion

The bottom line is that states have been preparing for a highly competitive presidential race and will be certain to ensure the results are accurate and timely. The rules of the road are clear in disputing election (allegations of fraud) results and requesting recounts, and all eyes will be on those states if their results will determine the winner. While it could be a bumpy road over the next several weeks, it’s unlikely Americans will have to go too long before they know who will serve as president for the next four years.

1 Source: Bloomberg, “Election Night Has Paths to a Fast Result—or a Lengthy Slog,” Oct. 14, 2020

Important information

Blog header image: Hill Street Studios / Getty

The opinions referenced above are those of the authors as of Oct. 30, 2020. These comments should not be construed as recommendations, but as an illustration of broader themes. Forward-looking statements are not guarantees of future results. They involve risks, uncertainties and assumptions; there can be no assurance that actual results will not differ materially from expectations.

from Expert Investment Views: Invesco Blog https://www.blog.invesco.us.com/election-night-2020-champagne-and-cheers-or-anxiety-and-jeers/?utm_source=rss&utm_medium=rss&utm_campaign=election-night-2020-champagne-and-cheers-or-anxiety-and-jeers

[georgecmatthews]

Smart cars are getting much smarter

Three years ago, we wrote about “your car in 5 years’ time,” but it is already time for an update. Voice commands have been fully integrated into new cars, and they’re capable of doing much than the commercials demonstrating “Alexa, start my car,” promised. Making phone calls hands-free in the car seems normal now, and so progress goes, the fantastic and whimsical becoming commonplace.

The auto companies are serious about innovation. Research and development (R&D) dollars spent in the auto industry were close to $130 billion in 2018, only trailing R&D dollars spent in the Healthcare and Information and Communications Technology sectors.1

We didn’t predict the auto slump in the fourth quarter of 2019, but we believe there will be a quick rebound, helped by the pandemic. People will be increasingly relying on their cars for transport as concerns about exposure to the virus has caused the volume of public transport and air travel to fall off a cliff. We expect motor vehicle miles travelled will benefit from these declines.

The pandemic has started a deurbanization trend, as fewer employers may return to requiring workers to be onsite five days a week. As more people have the opportunity to work from anywhere, more are likely to leave cities and commuter towns. The move to areas with fewer public transportation options will encourage more travel by vehicle. So too will the fact that people can combine work and travel more easily because they can now work remotely from any location, even as passengers in car while travelling to an area they’re visiting for a getaway.

Millennials are getting married and having kids later than previous generations did.3 Having more young families living further away from major cities will increase the pace of deurbanization and create more multi-car families.

From “Alexa, start my car,” it is an easy next step to “set the temperature to 70 degrees,” and or having the car automatically program the GPS for the address of an event in your calendar. While all this technology-based convenience does require more interconnectivity, with greater demands for communication between the car and the driver’s smartphone, this level of connection can be facilitated through 5G cellular access. 5G can handle many times more bandwidth than 4G, and that will enable all sorts of tiny devices to connect to the internet and talk to each other. Examples of this may include communicating with personal wearable devices that can detect a driver’s body temperature and set the car temperature to best align with that or sense when a driver is getting drowsy and lower car temperature to keep them more alert.

Qualcomm is the leader in the 5G with the intellectual property rights to much of the technology that drives it. All the major producers of 5G communication equipment have agreed to work with Qualcomm or pay it a royalty. 5G will allow more users to have high-speed Internet access at the same time, so cars can talk to other cars and to the cloud, while passengers stream their entertainment or work video calls, without any delays in data transmission times.

Making some of the examples cited here – like adjusting the car’s internal temperature in response to the driver’s or delivering directions to an event scheduled in someone’s calendar — requires not just communication between devices, but also quick and local machine intelligence, facilitated by processing semiconductor chips in the car. The technology required is already in cars. For example, with lane departure warning systems, a sensor detects when a car is drifting and sends the information to a central processing unit, which then sends information to the steering and tires to bring the car back into its lane. Adding more functionality adds complexity and increases need to keep the systems separate and secure, and that is something Blackberry is most expert at doing.  

Corning, which makes touchscreens, is also developing tough but lightweight glass that will be used in car windows. Reducing a car’s weight helps save on battery power and also lowers the car’s center of gravity, thereby increasing a car’s ease of handling.

It is easy to understand why people compare new electrified cars to smartphones. Still, there is a huge difference in the power demands of smart phones vs. cars, with the primary purpose of the latter being to move people and cargo — a power-hungry task. While smartphones can be powered by 12-volt batteries, cars will need much higher voltages to power all these new features. While smartphones can be powered by simple 12-volt batteries, the voltage needed to quickly charge powerful car batteries is much higher, and the silicon semiconductor chips that are used in smartphones can’t handle this level of voltage or the associated high temperatures. The auto industry is instead looking to use Silicon Carbide (SiC).

SiC is a crystal that is transparent and glittering. Picture a diamond without the branding people behind it. It is difficult to make because high temperatures and high pressure are required. The American manufacturer Cree has been making SiC for 30 years for more niche applications, and we believe it is poised to benefit from the growth in the usage of SiC. 

As part of our investment process, we get to travel the world to find companies that will benefit from changes such as the ones transforming the auto industry. An example is PVA TePla in Germany, which makes the furnaces that Cree uses to grow SiC under high temperature and high pressure. Another example DISCO Corporation in Japan, which makes cutting-edge tools to slice the SiC. Silicon can be cut using grinding saws, but SiC is much harder, and much more expensive, and saws cause too much waste. DISCO has developed laser cutting tools for SiC that allow companies to get significantly more out of each SiC ingot.

We may not have cars traveling through the air, as many futurists imagined, but cars continue to deliver breakthrough technologies that make driving safer, convenient, and more fun. We continue to search for companies that we think can enable investors to benefit from these transformative innovations.

1  Source: “European Autos: The Reincarnation of the Car,” Sanford C. Bernstein & Co., LLC, 9/8/20.

2  Source: “European Autos: The Reincarnation of the Car,” Sanford C. Bernstein & Co., LLC, 9/8/20.

3  Source: The US Census Bureau, Feb. 2020

As of 9/30/20, Qualcomm represented 1.57% of Invesco Global Opportunities Fund’s holdings; Blackberry, 0.24%; Corning, 0.43%; Cree, 0.85%; PVA TePla, 0.38%; and DISCO Corporation, 0.65%. Holdings are subject to change and are not buy/sell recommendations.

Important Information

Image Credit: Monty Rakusen / Getty

Many products and services offered in technology-related industries are subject to rapid obsolescence, which may lower the value of the issuers.

Before investing, investors should carefully read the prospectus and/or summary prospectus and carefully consider the investment objectives, risks, charges and expenses. For this and more complete information about the fund(s), investors should ask their investment professional for a prospectus/summary prospectus or visit invesco.com/fundprospectus.

The opinions referenced above are those of the authors as of Oct. 31, 2020. These comments should not be construed as recommendations, but as an illustration of broader themes. Forward-looking statements are not guarantees of future results. They involve risks, uncertainties and assumptions; there can be no assurance that actual results will not differ materially from expectations.

This does not constitute a recommendation of any investment strategy or product for a particular investor. Investors should consult a financial advisor/financial consultant before making any investment decisions. Invesco does not provide tax advice. The tax information contained herein is general and is not exhaustive by nature. Federal and state tax laws are complex and constantly changing. Investors should always consult their own legal or tax professional for information concerning their individual situation. The opinions expressed are those of the authors, are based on current market conditions and are subject to change without notice. These opinions may differ from those of other Invesco investment professionals.

from Expert Investment Views: Invesco Blog https://www.blog.invesco.us.com/smart-cars-are-getting-much-smarter/?utm_source=rss&utm_medium=rss&utm_campaign=smart-cars-are-getting-much-smarter

[georgecmatthews]

Election 2020: Five truths to remember about politics and investing

Vice President Dan Quayle once declared, “This election is about who’s going to be the next president of the United States!”1  Quayle’s stating of the obvious was mocked by the nation’s punditry. From an investors’ perspective, however, the gaffe might be more brilliant than any of us originally realized. 

History teaches us that elections tend to not have the dramatic impact on the financial markets that investors fear or hope.  After all, the US equity market, as represented by the S&P 500 Index, returned 10.2% per year from 1957 through the end of the third quarter 2020.2  Per the Rule of 72, that’s a doubling of the broad US equity market every 7.05 years across seven Republican administrations and five Democratic administrations.3 

With the nation mercifully approaching the Nov. 3 election, I believe there are five truths about politics and investing that are important to remember.  As Jerry Seinfeld titled his 1998 comedy special, “I’m telling you for the last time” (or at least until 2024).

1. Hating the government is not an investment strategy

The last presidential election was decided by 80,000 people in three states.4  In a country of about 328 million people (130 million voters), that is a remarkably small number.5  Prior to that, in 2012, Barack Obama won re-election with only 51.06% of the vote.6  Recent poll numbers are again telling us that a large percentage of the population may not be happy with the outcome.7

Fortunately, it is not a prerequisite that an overwhelming majority of the country approve of the president for US equities to go up.  In fact, history has shown it’s just the opposite:  Markets, historically, have performed best when the president’s approval rating was between 35 and 50, proving, once and for all, that hating the government is not an investment strategy.8 

2. Divided government is not a prerequisite for sound market performance

It’s no secret that the US equity market has historically performed best with a divided government.  Although I’d argue that well-known “fact” may not be as statistically significant as investors suspect.  For example, since 1933, the best outcome for the S&P 500 Index (+13.6%) based on partisan control was with Democrats in the White House and Senate, and Republicans controlling the House of Representatives.9  What is often not mentioned is that combination only existed in four of the past 88 years (4.5% of the time), from 2011-2015.  With apologies to President Barack Obama, Majority Leader Harry Reid, and Speaker John Boehner, I suspect the outsized outcome was largely reflective of the times (economic recovery, US Federal Reserve’s zero interest policy) rather than of the talents of the nation’s leaders.

For what it’s worth, the US equity market has also occasionally produced outsized returns even under single-party government rule.  A unified government did not appear to be an issue for the S&P 500 Index in Obama’s first year (+44% from Jan. 20, 2009, to Jan. 20, 2010) nor in Donald Trump’s first year (+26% from Jan. 20, 2017, to Jan. 20, 2018).10

3. Specific market predictions based on election outcomes tend to be inaccurate

There is a cottage industry built on advising investors on how different asset classes, sectors, and industries may perform based upon which party controls the executive branch of government.  Does anyone ever go back and look at the predictions? 

For example, in 2008, many people believed that the McCain-Palin “drill baby, drill” ticket was good for big oil, while Obama-Biden were going to decimate the fossil fuel industry. But in Obama’s first term, advanced techniques for oil extraction drove production to a 45-year high11 and the Alerian Master Limited Partnership Index climbed by 93%.12  And in 2016, many believed that Trump’s tax and regulatory policies would lead to a sustained rise in interest rates and unlock the value that existed in the financial sector.  Although the stock market performed well during Trump’s term, the financial sector was among the worst performing sectors.13 

4. Starting points matter

How is it that such diverse presidents as Ronald Reagan, Bill Clinton, and Barack Obama each experienced outsized equity market returns over the course of their administrations?  To rephrase Clinton strategist James Carville, “It’s the starting point, stupid.” 

Reagan, Clinton, and Obama each became president at moments when:

The economy was in or recently coming out of recession.14

Stocks were trading at historically cheap levels.15

The Federal Reserve was easing financial conditions.16

Today’s backdrop doesn’t appear to be significantly different than the one those presidents inherited (while stocks aren’t necessarily trading at cheap levels, they are historically cheap to bonds).17 That’s true no matter who wins the election. 

5. Private sector ingenuity continues unabated

Quayle was right.  This election is about who’s going to be the next president of the United States — it’s not about which sector may outperform next year, or where the stock market may be in the next four years. I’m far more interested in the business leaders who are going to harness the powers of artificial intelligence and robotics, create the next generation of life sciences that can cure our most debilitating diseases, address the COVID crisis, continue to evolve the nation’s energy sources, and develop new technologies and new industries that aren’t even yet on our radar. Here’s an abridged list of products or services brought to the market over the past 12 years: cloud computing, tablets, wearable fitness trackers, 3D printing, social media, ride sharing, the world’s first full face transplant, the world’s first bionic eye implant, electric cars, driverless cars, virtual meeting software, gene editing, multi-use rockets, virtual home assistants, virtual payment systems, smart homes, to name a few. 

History suggests that the advancements are about to get a whole lot better, irrespective of who wins the election.  They always have.

1 This quote, reportedly uttered on the campaign trail in 1988, is widely found on many lists of famous quotes from politicians, including brainyquote.com, quotefancy.com, and many more.

2 Source: Bloomberg, Standard & Poor’s, as of 9/30/20.

3 Source: Bloomberg, Standard & Poor’s, as of 9/30/20. The Rule of 72 is a popular shortcut used to estimate the number of years required for an investment to double in value at a given annual rate of return.

4 Source: Federal Election Commission

5 Source: US Census Bureau, as of 2019

6 Source: Federal Election Commission

7 Source: RealClearPolitics, as of 10/22/20.

8 Source: Bloomberg, Gallup, Invesco, as of 9/30/20.  Results are based on grouping the Gallup Presidential Approval Ratings into four quadrants (> 65, 50-65, 35-50, and <35).

9 Source: Strategas Research Partners, as of 9/30/20.

10 Source: Bloomberg, Standard & Poor’s, as of 9/30/20.

11 Source: US Department of Energy

12 Source: Bloomberg

13 Source: Bloomberg, Standard & Poor’s, as of 9/30/20.  Results are a comparison of the S&P 500 Financial Sectors Index vs. each of the other S&P 500 Global Industry Classified Standard (GICS) 1 sector indices.

14 Source: US Bureau of Economic Analysis

15 Source: Bloomberg, as represented by the price to earnings ratio of the S&P 500 Index.

16 Source: US Federal Reserve

17 Source: Bloomberg, as of 9/30/20.  Analysis compares the earning yield of the S&P 500 Index to the 10-year US Treasury rate.

Important information

Blog header image: Bloomberg Creative / Getty

All investing involves risk, including the risk of loss.

The Alerian MLP Index is a float-adjusted, capitalization-weighted index measuring master limited partnerships, whose constituents represent approximately 85% of total float-adjusted market capitalization.

The opinions referenced above are those of the author as of Oct. 28, 2020. These comments should not be construed as recommendations, but as an illustration of broader themes. Forward-looking statements are not guarantees of future results. They involve risks, uncertainties and assumptions; there can be no assurance that actual results will not differ materially from expectations.

from Expert Investment Views: Invesco Blog https://www.blog.invesco.us.com/election-2020-five-truths-to-remember-about-politics-and-investing/?utm_source=rss&utm_medium=rss&utm_campaign=election-2020-five-truths-to-remember-about-politics-and-investing

[georgecmatthews]

Stay prepared for a volatile autumn

I am lucky enough to have developed a network of friends despite being a working mom. Some of these friends go back to childhood and high school, some are moms I have met through my children’s schools, and some are friends I have met in the workplace. They have provided a wonderful web of support throughout the chaos that can be child-rearing and everyday life. I have joked with them about particularly bad days — like a parent-teacher conference that we expected to go awry — as being “Pepto-Bismol” days, referring to the medicine used to combat upset stomach (an unfortunate symptom of many a crazy day).

Well, I feel some serious Pepto-Bismol days coming on, given the impending US presidential election, the declining possibility of another US fiscal stimulus package in 2020, and rising COVID-19 infection rates around the world.

Is a contested election in the cards?

Let’s start with the US presidential election. The final debate took place last week, and Americans are already voting in record numbers. According to Professor Michael McDonald of the University of Florida, about 59 million people have already voted in the presidential election as of Oct. 25. Of those, about 39.8 million have been mail-in ballots while about 19.2 million have been early in-person voting.1 The breakdown in terms of voter registration of those who have voted thus far is 49.1% Democrats, 27.9% Republicans, 0.6% other party (such as the Green Party) and 22.4% Independents.1

Those 59 million votes represent 42.8% of the total votes cast in the 2016 presidential election, which suggests that, when all is said and done, 2020 should be one for the record books in terms of high voter participation.1 While national polling indicates a solid, consistent lead by Joe Biden, state polling — which is what really matters, given that the electoral college, not the popular vote, determines the president — indicates a much tighter race. I am increasingly convinced that the winner may not be known on election night given that so many are voting by mail, and a number of swing states don’t start counting those ballots until election day. What’s far more troubling is that I believe there is a growing likelihood that the election will be contested. That’s enough to give investors a little dyspepsia.  

Will COVID-19 infections continue to rise?

Then there are the rising COVID-19 infection rates in a number of Western countries. The second wave in Europe is much bigger than the first, with France reaching over 52,000 confirmed infections on Sunday — a new record.2 Italy and the UK are also struggling to contain the virus, imposing targeted lockdowns. Other countries, such as Spain, are also seeing a rampant spread of the virus.2 In the US, it was reported that there were 78,702 new cases and at least 871 coronavirus deaths on Oct. 24.3 Over the last week, there has been an average of 68,127 cases per day, which is an increase of 32% from the average number of cases just two weeks earlier.3

The US seems to be following Europe’s trajectory, which means November and December could be increasingly worse for America and might include some targeted lockdowns, as we have already seen in Europe. To add to the anxiety, over the weekend, President Trump’s chief of staff Mark Meadows stated that “we are not going to control the pandemic” and said that the Trump administration would instead focus on therapies and a vaccine.4 But I believe the medical experts who expect an effective vaccine to be widely distributed by next summer, which means some difficult months ahead for the US. That could create more than a little indigestion for investors.

Is a 2020 fiscal stimulus deal doomed?

Finally, there is the waning possibility of another US fiscal stimulus package in 2020. I am an eternal optimist who has steadfastly believed that politicians’ desire to be re-elected meant there was a good chance that they would reach a fiscal stimulus deal before the Nov. 3 election. Now, even I believe that is becoming very unlikely — even though it is needed now more than ever, in my view, given this new wave of infections.

In the last several weeks, Federal Reserve officials have exhorted Congress to pass a stimulus package. Minneapolis Federal Reserve President Neel Kashkari recently voiced his concern that the economic recovery in the US may decelerate if unemployed Americans and struggling businesses do not receive more assistance, and that thousands more businesses could fail without additional stimulus. He fretted that unemployed consumers who are struggling to pay their bills could have negative repercussions for other parts of the economy. And he reminded Congress that monetary stimulus is no substitute for fiscal stimulus: “If you can’t pay your bills, more quantitative easing is a poor substitute for extended unemployment insurance. … Only Congress has the ability to get that direct fiscal aid to the small businesses and to the Americans who have lost their jobs and who are facing real hardship.”5  This comes after his sounding the alarm bells the previous week, warning that a lack of another fiscal stimulus package would bring “enormous consequences.”6 Fed Chairman Jerome Powell also earlier this month warned again about the need for additional government aid, saying the consequences of inaction could be “tragic.”7

No fiscal stimulus for the next several months has the potential to not only negatively impact the economy — exacerbating the recovery’s ‘k shape’ — but also create a few ulcers for investors.

Six tips for weathering market anxiety

Given all of the above, this autumn could cause some “Pepto Bismol days” for investors — and possibly lead them to make hasty, fear-driven investment decisions. And so I present to you some tips to help weather market-driven anxiety in the upcoming days and weeks:

Expect volatility. We have multiple potential sources of uncertainty, which can lead to significant volatility and stock market sell-offs. If you expect this kind of market environment, you are less likely to be rattled by it.

Keep in mind there is always some positive news under the scary headlines. We may not know who our next president is on the night of Nov. 3, but we will likely know within a week or a few weeks — and we will certainly know by Inauguration Day in January, which is a relatively short period of time in the grand scheme of things. And fiscal stimulus is not a question of “if” but “when.” We might not get it in 2020, but I believe we are likely to get a significant stimulus package in early 2021. Finally, while COVID-19 infections are on the rise, serious illnesses and deaths are much lower than they were this spring. Last week Dr. Scott Gottlieb, former commissioner of the US Food & Drug Administration, tweeted about two new peer-reviewed studies showing a sharp drop in mortality among hospitalized COVID patients. The drop is seen in all groups, including older patients and those with underlying conditions, suggesting providers are getting better at treating the illness.8

Don’t make major portfolio changes due to fear. In my view, this volatility likely won’t have a lasting impact on asset classes. It’s critical to stay focused on your long-term goals — and to talk to your financial professional before making major changes to your financial plan, to make sure your decisions align with your goals.

Look for opportunities. Uncertainty and hardship have a funny way of creating opportunities. For example, while many Western countries have had difficulty controlling the pandemic, countries such as South Korea, China, and Japan have been very adept at controlling the virus. We could see these countries benefit by attracting more foreign investment and expanding supply chains in their countries. After all, COVID-19 will likely not be the last pandemic we see in our lifetimes, and so the ability to control this virus may confer an advantage for handling future crises.

Remember what matters. In my view, monetary policy matters more when it comes to capital markets. In a recent presentation I made to institutional clients, I informally polled them about which factor they thought would have the biggest impact on markets in the near future. The options were fiscal policy, monetary policy, the presidential election, and COVID-19 infections. I was surprised to see that the top answer was COVID-19 infections, as I strenuously disagree. Yes, stocks fell substantially last February and March as COVID-19 spread. However, soon after the Fed began its very accommodative monetary policy response in March, stocks began to rise. The Fed has been a powerful force moving stocks higher. And so while we could see short-term sell-offs related to disappointing news about COVID-19 infections, I believe the very accommodative monetary policy environment we are in will matter more. In my opinion, who runs the Fed is far more important than who sits in the White House.

Try to relax. Maybe have some wine instead of that Pepto-Bismol. Pandemics, consequential elections and poor fiscal policy choices have all occurred before, and yet the stock market has survived and risen over time.

I learned a long time ago that there are many things we can’t control — all we can do is manage our reaction to them. The “Pepto-Bismol” days of parenting couldn’t be avoided — skipping that dreaded parent-teacher conference would have only made things worse in the long run — so I leaned on my network of friends to help me get through. Similarly, if the next few weeks end up inducing a bout of investor indigestion, your trusted financial professional can help you stay focused on your long-term goals, make sure that your portfolio decisions are aligned with your goals (and not your fears), and find opportunities that may present themselves.

1 Source: U.S. Elections Project, “2020 General Election Early Vote Statistics,” Oct. 25, 2020

2 Source: The Wall Street Journal, “Europe Imposes New Covid-19 Restrictions as Second Wave Accelerates,” Oct. 25, 2020

3 Source: The New York Times, “Covid in the U.S.: Latest Map and Case Count,” Oct. 25, 2020

4 Source: CNN, “White House chief of staff: ‘We are not going to control the pandemic,’” Oct. 25, 2020

5 Source: Reuters, “Fed’s Kashkari: Recovery will be grinding and slow without more stimulus,” Oct. 15, 2020

6 Source: Business Insider, “Fed’s Kashkari warns of ‘enormous consequences’ if fiscal stimulus is not approved — and says there are no ‘moral hazards’ to supporting more aid,” Oct. 7, 2020

7 Source: The New York Times, “Trump Abruptly Ends Stimulus Talks After Fed Chair Urges Economic Support,” Oct. 6, 2020

8 Source: Twitter

Important information

Blog header image: Leslie Taylor / Stocksy

All investing involves risk, including the risk of loss.

The opinions referenced above are those of the authors as of Oct. 26, 2020. These comments should not be construed as recommendations, but as an illustration of broader themes. Forward-looking statements are not guarantees of future results. They involve risks, uncertainties and assumptions; there can be no assurance that actual results will not differ materially from expectations.

from Expert Investment Views: Invesco Blog https://www.blog.invesco.us.com/stay-prepared-for-a-volatile-autumn/?utm_source=rss&utm_medium=rss&utm_campaign=stay-prepared-for-a-volatile-autumn

[georgecmatthews]

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