positioned our portfolios for what we see emerging.
With the results of the 2020 Congressional and Presidential elections finalized, we have heard many questions about how the Democratic sweep might impact the markets in the months and years ahead. It is important to note that it is quite common for the executive and legislative branch to be unified during a U.S. president’s first term in office. In fact, every Democratic president since Woodrow Wilson (1913) served their first year in office with the support of a Democratic House and Senate. The addition of two Democratic senators from the Georgia runoff elections will give both Democrats and Republicans fifty seats, with Vice President-elect Kamala Harris casting the tiebreaking vote.
With only fifty votes in the Senate, the Democrats have no margin for dissention. West Virginia’s Joe Manchin, known as a “Conservative Democrat,” has already said that he will not support many progressive agendas. Other senators from states such as Montana, Arizona, Michigan, and Pennsylvania may feel constrained to vote in alignment with a progressive agenda, given that they hail from fairly red states. As such, we do not think that it is likely for highly progressive measures to pass. The market’s fear of a “blue wave,” which caused a market selloff in both September and October of 2020, was based on polls indicating a much larger blue wave than what actually occurred.
Nevertheless, the election results likely clear the path for more fiscal stimulus to be passed in the near term and for more infrastructure spending and changes to tax policy. While Biden has pledged to roll back some of the Trump tax cuts by raising tax rates for capital gains, high income earners, and corporations, the 50/50 split in the Senate may make this difficult to enact – especially given that the economy still has a long way to go to recover from the COVID-19 recession of 2020.
In terms of financial market impacts, we believe that the following may occur:
Given that the federal government has taken on a substantial amount of debt during the COVID-19 crisis, we believe that additional stimulus measures are likely to increase inflationary pressures down the road. This may cause an uptick in longer-term interest rates.
Some sectors of the stock market are likely to benefit more from Democratic control than others. For example, clean energy is likely to continue to perform well, given the Democratic push to usher in measures to reduce climate change, while big tech may come under pressure due to increased regulation and anti-trust probes. Additionally, municipal bonds could perform well as Democrats push for more aid to state and local governments and as demand for tax-exempt debt increases.
While U.S. – China trade tensions won’t be going away under a Biden administration, much of the market volatility stemming from trade tensions is likely to subside given that calmer rhetoric is expected.
Additionally, some asset classes are likely to benefit from Democratic control. Asset classes such as international and emerging markets stocks are trading much more cheaply than domestic stocks, and we expect the U.S. dollar to undergo a devaluation versus many foreign currencies under a Biden administration, which is an additional benefit to U.S.-based investors investing in foreign securities.
It is important to remember that at Beacon Wealth, we are not passive investors. We are active global investors. Because of this, we have both the ability and willingness to be nimble with your portfolio and to position it for what we believe is the most likely scenario. As one of our valued clients, the good news for our you is that we have already positioned portfolios to take advantage of many of these themes. We have proactively maintained positions in clean energy, reduced our exposure to rising interest rates on the long end of the yield curve, and have opportunistically added exposure to both international and emerging markets debt and equity over the last few months based on our outlook.
With the Federal Reserve reaffirming its commitment to maintain low interest rates for the foreseeable future and the recent passage of additional stimulus measures (with more stimulus likely to come), we believe we have a solid foundation to kick off 2021. While a market pullback or correction may occur over the short-term (perhaps due to setbacks related to COVID-19 or simply to consolidate recent market gains), it is important to remember that selloffs of at least 10% happen, on average, once per year and are healthy occurrences for the market, providing us with additional opportunities.
We recognize that this election cycle has been the most contentious in decades. However, we strongly believe that when you can put your political leanings and emotions aside and look to the long-term, you will be much more likely to reach your financial goals while being a faithful steward of the resources entrusted to your care.
As always, we appreciate your continued confidence. Please reach out to us with any questions you may have.
Hillary Sunderland, CFA®, CKA®
Chief Investment Officer for Beacon Wealth Consultants
Financial Planning & Investment Advisory services offered through Beacon Wealth Consultants, Inc., an Investment Advisor registered with the U.S. Securities and Exchange Commission. Beacon Wealth Consultants, Inc.’s disclosure document and ADV Firm Brochure are available by contacting our office at (540) 345-3891.