Market Update – Post-Election Outlook

November 30th, 2020 by Jonathan Chatfield, CFA

The election has passed and although the outcome remains contentious, we are edging closer to the electoral vote on Dec 14 and certification of the final outcome. The market has posted solid gains since Nov 3 and appears to be looking past election uncertainty and factoring in expectations of economic recovery in light of covid-19 vaccine and treatment developments.

Since our last update (October 5), certain economic indicators that had prompted us to underweight our allocations in most models have posted minor improvements and the stock market has posted single-digit gains.

  • The stock market has continued its recovery and risen another 6.5%. The S&P 500 has gained 12.4% for the year-to-date (through Nov 25).
  • While the economy continues to weather the storm of higher unemployment and economic contraction due to coronavirus-related business shutdowns, investor optimism about a post-crisis recovery continues to propel stock prices higher.
  • Low interest rates have underpinned growth in real estate prices and allowed homeowners to refinance at lower rates, providing a boost to consumer spending.
  • Additionally, low interest rates continue to fuel investor interest in dividend-paying stocks to provide retirement income.

Subsequent to the drastic slowdown in the first quarter, the U.S. economy has posted encouraging signs of recovery.

  • The unemployment rate, which peaked at 14.7% in April, continued its recovery trend to its current level of 6.9% (October).
  • After contracting -5% in the first quarter and -31.4% in the second quarter, total output recovered in the 3rd quarter, posting a +33.1% increase (2nd estimate from the BEA).
  • 4th quarter GDP forecasts range from 2.5% to 4% and the full year forecast is in the -3% to -4% percent range. In 2021, GDP is forecast at +4%.
  • Inflation remains tame at 1.2%, and the Fed has signaled it intends to keep rates near zero through 2023.
  • Additionally, we expect another stimulus package soon, and an expected infrastructure bill should underpin economic growth in 2021. Such stimulative economic policies help prevent further economic damage.

What does this mean for your investments?

With stock prices trading near all-time highs, we have maintained our underweighted equity allocation. We are shifting to an outlook of cautious optimism.

  • With the election behind us and a potential infrastructure bill under the new Administration, we are beginning to be cautiously optimistic about the stock market. An improving economy, due to receding concerns over the coronavirus in an era of vaccines and treatments, may lead to earnings gains in the year ahead. In this environment, we expect to adjust our equity exposure back to normal and increase allocation to stocks as opportunities present themselves.

 

About the author:

Jonathan Chatfield, CFA

Senior Portfolio Strategist

Mr. Chatfield has over 25 years of experience in the investment management industry.  He currently develops and implements the Anchor Bay Capital’s investment strategy across individually managed accounts.  He holds the Chartered Financial Analyst designation and is a member of the CFA Society of San Diego and the CFA Institute.