The uncertainty of the U.S. presidential election outcome is causing unease, but the closeness of the race highlights some issues that will be significant going forward.
Morningstar’s Aron Szapiro, head of policy research; Preston Caldwell, head of U.S. economics research; and Dave Sekera, chief U.S. market strategist, discussed the implications of these topics at length Wednesday.
1. Don’t expect big policy changes no matter who wins the Senate.
The Democrats were hoping to take over a majority in the Senate, which looks unlikely now. In fact, even if they still won the chamber, the majority would be so small, big changes couldn’t be made, says Szapiro.
“What we really all want to keep an eye on is the fate of stimulus and the lame duck, what the majority of senators want to do there. Again, we’ll get more clarity as we have final election results for both the Senate races and the presidential race,” he said.
2. A big stimulus is doubtful with a GOP Senate.
Pundits have stated that a “blue sweep” of the presidency and Congress would be good for a new stimulus package, however, the potential of a Biden presidency with a GOP senate doesn’t bode well for a large stimulus package, says Caldwell.
“We thought that if either Trump won or if Biden won along with a Democratic Senate, the chances of another massive stimulus in 2021 were quite good,” he said.
“By contrast, the prospects for stimulus in a Biden win/GOP Senate outcome look poor. Recent historical experience suggests that a Democratic president paired with a GOP Congress is likely to result in gridlock as well as stringency on the deficit,” he explained.
3. A vaccine for COVID-19 is key.
Lack of a stimulus package is not a “fatal threat” to an economic recovery, Caldwell adds. However, what is important is a safe vaccine with broad use in the first part of 2021.
Much of the U.S. economy is actually in good shape, he says, “with the exception of some industries like restaurants, hospitality, and air travel,” which are still being hit hard by the need to social distance.
“Broad vaccination will clear the way for a complete economic recovery, including these hard-hit industries. [Also] we shouldn’t forget the beneficial impact of the stimulus already passed in 2020, which is still having an ongoing effect on the economy,” he said.
4. Stocks will be volatile in the short term.
Sekera cautions against making any significant portfolio changes right now, especially long-term investors.
Like Caldwell, he notes that the vaccine’s the thing, stating that it will be “the larger determinant of the stock market performance over the next couple of quarters.”
Although he says they see the market to be close to fair value at this point, “the valuation of the broad market is skewed upwards by several mega-cap stocks that we think are significantly overvalued. If you were to adjust by removing those overvalued stocks from our borrowed market valuation, we probably think the rest of the market is a little bit undervalued at this point.”
Although it’s less likely the Democrats will win the Senate, if they do, he says that tax hikes might be a drag on stocks, although he says they believe corporate tax hikes already are priced into the market.
He adds that the best opportunities are in mid- to small-cap value stocks and that energy is “very cheap.”
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