What lies ahead?
Key Federated Hermes investment professionals weigh in on election's implications.
Fixed Income: Not a lot of changes … yet
The “most consequential election of our lifetime” is now (largely?) behind us; however, was it so consequential to the bond market, where rates stayed low and spreads stayed relatively tight in the run-up to the election? Since the market concluded over the last week that virtually all president, Senate and House outcomes led to expectations of more fiscal stimulus and a continued dovish Fed, the biggest uncertainty to the bond market was the possibility of a contested election and constitutional crisis. As the latter threat seemingly faded the last few days (at least for now), the market returned its focus to the Fs (Fed and Fiscal)—and not the Cs (constitutional crisis and Covid). Constitutional crisis concerns have faded somewhat given the margin of victory.
To be sure, Election Night did bring some volatility. The 10-year Treasury yield started the day at 0.85%, traded as high as 0.95% and then reversed as the Blue Wave outcome faded to a low of 0.72% in early morning hours of Nov. 5. Now they’re trending up again amid concerns two key Senate races in Georgia could, though unlikely, go to Democrats if there are special runoff elections in early January, potentially giving Democrats control of both chambers of Congress as well as the White House—more of a Blue Ripple than a Blue Wave. (See my colleague Stephen Auth’s more detailed thoughts on this in a related piece.) It’s too early to make that call, but it’s very much worth watching.
Longer term, a new Biden administration in combination with a split Congress (our base case for now) should result in somewhat more moderated growth with “lower for longer” interest rates—think relatively unchanged yield curve and steady credit spreads, with lower bond market volatility reminiscent of the post-2008 Global Financial Crisis period. – Robert Ostrowski, CIO, Global Fixed Income
Equities: Divided we stand
As the pollsters scrape the eggs off their collective faces and the lawyers arm up, the one clear verdict coming from this election is no one party won. The Blue Wave died on the shores of Maine, where Sen. Collins staged an unheard of comeback. We are heading for divided government, a far happier outcome for markets. We should still get a substantial fiscal package but avoid growth-killing tax hikes planned by the Democrats in a sweep. This is supportive of our bullish market call for 2021, and our longer-term 5,000 target on the S&P 500 remains intact.
The key risks for the market in the next few weeks come down to two, in our view. First, we could see a rise in civil unrest over the very divided outcome in a very divided country. Depending on how bad this gets, it could negatively impact economic forecasts for the economic revival. Second, the Covid resurgence we are seeing in Europe appears to be picking up steam here, as well. We see both these risks as real but short term.
Looking forward to the spring, Covid should be waning with the combination of improving treatments, the arrival of multiple vaccines, warmer weather and fewer and fewer people left to infect. The economic revival already underway should accelerate with another fiscal stimulus deal likely and visibility on the election/forward tax environment encouraging an investment resurgence. Cyclical companies will be lapping very weak or negative numbers, helping the cyclical side of the market which has been a key drag till now. The Fed will keep short rates pinned near zero, and with deficits likely to rise in a divided government scenario, the yield curve should steepen somewhat; more good news for financials, a big piece of the value trade, where stocks are cheap.
So while we had no clear political winner, we did have a winner: Mr. Market. – Stephen Auth, CIO, Equities
Money Markets: Uncertainty isn’t going away
The uncertainty of the election is (mostly) over, but there’s plenty more to go around for the liquidity markets. Deciphering the implications of the results for additional fiscal stimulus and policy changes alone are more than enough reasons we expect to see unsettled investors.
But anxiety will be heightened because of the proximity to year-end, typically a time of intensified trading. So, we expect to see some volatility, although paling in comparison to other asset classes. In fact, year-end pressure could lead to a small increase in the yield spread between money market products and Treasuries and government agency debt.
Whatever the situation, we will continue to position our portfolios with an abundance of liquidity. In 2021, we think Covid-19 will remain the biggest market driver, making the relative safety of cash alternatives as crucial as ever. – Deborah Cunningham, CIO, Global Liquidity Markets
International: Welcome back to Paris
It seems likely that we will end up with a Democrat in the White House, a Republican Senate and a Democrat House, which will lead to gridlock. This mix of leadership will be an adjustment following the Red Wave of the Trump administration and the Blue Wave of Obama, where all three were aligned. That being said, in terms of overall policy, this likely means that the U.S. will get a much smaller fiscal stimulus, so monetary policy will need to continue to do the heavy lifting and the Fed will need to reiterate its ‘lower for longer’ rate policy.
Unfortunately, Biden likely will struggle to confirm his Cabinet nominees, particularly in sensitive areas like finance, employment and environmental regulation, meaning it is highly probable that plans for substantial legislation on things like voting rights, health care and climate change will be stopped dead in their tracks. In the very near term, I suspect that both sides will be lawyering up, but this should only be a near-term distraction and ultimately come to nothing.
This week, we saw the U.S. exit the Paris Climate Agreement, formally casting off the signature international commitment to cut carbon emissions and limit global warming. Biden, however, has stated his intentions of rejoining, a move that would align with his climate agenda, the most ambitious of any presidential candidate in history. – Eoin Murray, Head of Investment, International