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The Pandemic, Politics and Markets

Some financial advisors consider the big unknowns

While the pandemic-induced investor panic of March 2020 has largely subsided given a rebound in stock markets, some financial advisors maintain that clients’ anxieties are now focused on something else: political uncertainty. Others, however, point to sustained COVID-related economic fallout as the primary worry.

Matt12 name 3“I think the anxiousness has moved on to politics,” Matthew Senicola, CRPC®, AAMS®, branch manager /managing partner of North Shore Wealth Management Group LLC, said. “I think this may be one of the more emotionally charged elections in history.”(And he made that comment to Advisors Magazine well before the first, cantankerous, September 29 Presidential Debate.)
 
Senicola — whose office is based in Massapequa, Long Island, NY — concurs with others that trying to allocate a portfolio based around a potential political change is difficult. In 2016, many Wall Streeters thought that if Trump won the markets would implode, which did not happen. And at the time of this writing, many people were still unclear as to where Biden stands, he said.

“Is [Biden] simply a placeholder who will allow more extreme leftist policies to form, or will he stay somewhere in the middle?” Senicola wondered. “If he wins and the GOP retains the Senate, it’s going to be difficult (for Biden) to drive through real change,” he continued. “If the Dems take the Senate then it could be a different scenario and higher taxes are almost a given, which ultimately would not be viewed as favorable to the market.”

emma 100Emma Foulkes, CFP® and managing partner at Atlanta-based Greenwood Wealth Management, agreed to some extent that a Biden-led platform would not instantly fix the economic damage done as a result of the pandemic.

“It may take years just like recessions in the past,” she said, adding, “A ‘Build Back Better’ Biden win could be higher taxes for the wealthy and multi-million-dollar corporations, and there is also the fear that Biden will increase regulatory scrutiny.”

Foulkes sees, however, a silver lining for markets with a Biden presidency.

“The flip side is there will be opportunities in the ESG (Environmental, Social, Governance stocks) sector as Biden and the Democrats focus on Innovation and cleaning up the environment,” she noted. “Biden’s plans to make investments into biotech, clean energy and AI (artificial intelligence) will become a huge growth area.”

She remarked that Biden could also have a positive impact if he has a plan for dealing with COVID-19.

“People want to see an approach to the virus that will open our economy back up,” Foulkes said. “As a country we have not had a unified plan to deal with this. It has been left up to local leadership, so we are disjointed in our approach.”

Stock500x500Prior to the debate, Senicola believed the Trump campaign still had not offered a new direction, so the prevailing perception is it will be more of the same if he is re-elected.

“His policies, which favor lower corporate taxes and less government regulation, have been very market friendly,” Senicola acknowledged, adding, “Trump has been very tough on international trade which could be expected to continue if he has another term; these trade wars have caused periods of sharp market volatility and erratic trading.”

Foulkes said that development of a virus vaccine would be good for Trump’s re-election, something that’s already baked into assumptions for the markets, but any vaccine is unlikely to be widely distributed before mid-2021.

“If Trump wins, Wall Street will be happy because Trump is pro-business and pro-lower taxes for the top 1 percent of income earners,” she added. But she warned: “Wall Street and the top 1 percent can’t keep the economy propped up on their own. If ‘America First’ Trump wins and does not have a succinct plan to deal with the virus, our economy could experience things we haven’t seen since Nixon and Carter years.”

Befuddled is the word Senicola uses to describe his clients’ concerns about the current stock market.

“The media continues to report a plethora of reasons why the market should be lower, yet the indexes continue to grind higher,” he noted.

Reflecting the market rebound, David Chwalek, CDFA, CRPS, partner at Concord, MA-based Senes & Chwalek Financial Advisors said clients are much less concerned now than they were in February and March of this year when the pandemic started to sap the economy and there was so much uncertainty.

“There is definitely less panic now because they aren't hearing about how bad the market is every time they turn on the news,” he said. “We are concerned, however, that there is the potential for another big drop ahead of us,” he cautioned. “We have been very pro-active this summer getting in touch with our clients and suggesting, at least for those with shorter time horizons, that they reduce stock exposure a bit and possibly keep more cash than they normally would.”

He explained that many market observers — as well as some clients who watch the market watchers — do wonder if another shoe is about to drop.

moneycovid 400500“It just feels crazy that the stock market has done so well with the COVID situation not really showing many signs of letting up any time soon,” Chwalek said. “We've had clients start to use the ‘bubble’ word a lot more lately.”

Concurring with Foulkes, Chwalek insisted that the economic fallout from the ongoing COVID-19 situation overshadows the impact of the presidential election, at least from a financial perspective.

“In the short term, I believe we'll see a falling market regardless of who wins in November,” he said. “Over the longer term, I think four more years of Trump carries more risk to the stock market than Biden does,” he added.

Chwalek agreed that Trump is viewed as business-friendly and good for the economy. “However, his divisiveness and unpredictable behavior — especially with no worries of another election in 2024 — brings the potential for some unforeseen threats,” he said.

To George Webb, managing partner at Waltham, MA-based Pension & Wealth Management Advisors, the key to future market impact is about the election — but not who will be elected president.

geroge 150 16“Regardless of Trump or Biden, the issue will come down to whomever controls the Senate after the election,” Webb told Advisors Magazine. “That is the short-term political risk to the market.”

In his view, if there is a blue wave that carries Biden to victory and also flips the Senate to a Democratic majority along with the party’s current control of the House, it will be easier to push through legislation that increases the corporate tax rate, regulation and other policies that have been outlined as part of the Democratic economic platform.

“A blue wave would likely result in a market sell-off, at least short-term,” Webb said. “But if Trump is re-elected, or the Senate does not change control, we’ll probably see a relief rally driven by more visibility on economic policies.”

However, he expects whomever is president won’t really matter longer-term because the market will refocus on fundamentals.

“We came into February of this year with historically robust economic fundamentals,” Webb explained. “Then COVID-19 swept over the country and we had a pandemic-driven market. Then it evolved to a government-driven market, then a science-driven market as we watched for daily updates on vaccines and therapies. Now we’re seeing a short period of politically driven markets. Once we’re past all this political noise, the market will refocus on fundamentals again — it always does.”

Webb’s portfolio manager, Fred Sears, also serves on the firm’s investment committee. While Sears is not anticipating an unsettled presidential election due to possibly prolonged vote counting and recounting as in 2000, he acknowledges that markets hate uncertainty.

“There would likely be a large downward market correction if we do have to wait for the election results,” Sears said, “but I don’t see that happening at this time.”

But Sears’ remark was made before the Sept. 29 debate when Trump questioned the looming election’s integrity, saying it could “take months” to certify results and ominously mentioned that “it won’t end well.” Overall, however, Sears and Pension & Wealth Management Advisors’ investment committee remain optimistic on the long-term potential for the U.S. economy.

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