November 30, 2020

COVID-19 MAY THREATEN THE RECOVERY

Jeffrey Buchbinder, CFA, Equity Strategist, LPL Financial

Nick Pergakis, Analyst, LPL Financial

A new wave of COVID-19 cases threatens to trip up the economy. Increasing cases in Europe and the United States have brought new restrictions on activities, but the market doesn’t appear to be fazed by the recent outbreaks. Progress on developing vaccines has provided a clear boost to sentiment, but prospects for a divided Congress and the potential for more fiscal policy support also may be playing a role.

NEW WAVE OF COVID-19

Just as the economic recovery was beginning to gain some steam, COVID-19 cases have been rising dramatically in several regions around the world [FIGURE 1]. The change of seasons is adding to concerns, as colder weather shifts more activities indoors—increasing the chances of viral transmissions. This has prompted many governments to take greater action to try to curb the spread of COVID-19. Several countries and many states in the United States have rolled back reopening plans and implemented new restrictions such as school closures, nighttime curfews, and even stay-at-home orders.

November 23, 2020

FROTHY SENTIMENT RIDES BULLISH TECHNICALS

Ryan Detrick, CMT, Chief Market Strategist, LPL Financial

Scott Brown, CMT, Senior Analyst, LPL Financial

The post-election environment and positive developments toward a COVID-19 vaccine have led to a surge in stock prices. The added clarity on these two fronts has boosted sentiment, which may present a risk in the near term as stock prices are near all-time highs.

A NOVEMBER TO REMEMBER

The reaction from stocks since the US election has been truly impressive. The S&P 500 Index is up 8.8% for the month, on pace to be the best November for the S&P 500 in 40 years. Small caps have also soared, with the Russell 2000 Index up 16%, which would be its second-best month ever. Although we remain longer-term bullish on equities, there are some signs that sentiment could be getting a little frothy at the moment, which could increase the odds of a pullback.

TECHNICALS SUPPORTIVE OF FUTURE STRENGTH

On November 9, more than 71% of the stocks in the S&P 500 hit a one-month high, the third-highest reading using data back to 1990. Not only does this tell us that participation in the post-election rally has been extremely broad and not limited to only a few heavily weighted names in the index, but historically this has been an extremely positive signal for the next year. Returns can be quite weak in the near term after more than 65% of stocks reach a one-month high, but returns over the next 12 months not only have been far above average, but have been positive in all seven observed instances [Figure 1].

November 9, 2020

MARKET-FRIENDLY ELECTION OUTCOME

Jeffrey Buchbinder, CFA, Equity Strategist, LPL Financial

Tom Goulder, CFA, Senior Analyst, LPL Financial

Nick Pergakis, Analyst, LPL Financial

Heading into the election, polling data and market signals disagreed on how close the presidential election would be, with market signals calling the race much closer—which turned out to be accurate. Now that we have more clarity on the results of the election, we can review what we believe will be some of the key market implications going forward.

BIDEN WINS BUT SENATE YET TO BE DECIDED

Former Vice President Joe Biden has been elected the 46th President of the United States, defeating President Donald Trump in a tight race. Based on the polls and some market signals, the outcome of the presidential election may not have been much of a surprise.

The Senate was a different story. Conventional wisdom expected the Senate to go the same way as the top of the ticket. But the stronger-than-expected performance by some Senate Republicans considered vulnerable means that the Democrats will have to win both Georgia Senate seats in January runoffs—a tall task in a traditionally conservative state—to reach 50 seats and take control of the Senate (Vice President-elect Kamala Harris would break any tie). Here we focus on the most likely outcome—a split Congress under Biden.

November 2, 2020

RECORD GDP ON THE EVE OF THE ELECTION

Ryan Detrick, CMT, Chief Market Strategist, LPL Financial

Barry Gilbert, CFA, PhD, Asset Allocation Strategist, LPL Financial

Nick Pergakis, Analyst, LPL Financial

2020 has been a year of records, both record losses and record gains. After a brutal spring, markets and the economy have mostly rebounded in the summer and fall. We take a closer look at October 26’s record gross domestic product (GDP) report, which may have implications for the upcoming presidential election.

RECORD GROWTH IN THE THIRD QUARTER

The outbreak of COVID-19 and the subsequent lockdowns triggered the largest quarter-over-quarter decline in GDP since WWII, so perhaps it comes as no surprise that the following quarter tallied the sharpest rebound in that same time period. GDP grew 33.1% annualized in the third quarter, ahead of Bloomberg consensus estimates of 32% and reversing much of the economic fallout stemming from COVID-19-related lockdowns. The largest segment of the US economy—consumer spending— rebounded in a big fashion, while business investment and inventories also helped fuel the surge in growth [Figure 1]. Residential investment also gained momentum in the third quarter, driven by pent-up demand, the work-from-home trend, and historically low mortgage rates.

October 26, 2020

ARE THE POLLS WRONG AGAIN?

Ryan Detrick, CMT, Chief Market Strategist, LPL Financial

Nick Pergakis, Analyst, LPL Financial

The race for the White House is down to the homestretch, and although presidential candidate Joe Biden is comfortably ahead in the election polls, various market and economic-based indicators suggest the election may be much closer than many are expecting.

SUPPORT FOR A BIDEN VICTORY

Various polls show former Vice President Joe Biden comfortably in the lead in the 2020 presidential race, although in some battleground states the race appears to be quickly tightening. Influential states like Ohio and Pennsylvania may even be a coin toss at this point.

Not surprisingly, approval ratings can play a large part in forecasting the overall percentage of the votes in an election. Only two presidents have lost reelections since the Great Depression: George H. W. Bush and Jimmy Carter. Not surprisingly, both had low approval ratings leading up to the elections. If the people don’t approve of the job you’re doing, you may not serve a second term.

Recent Gallup polls suggest that President Donald Trump’s approval rating is 43%. Using a regression of previous elections, this equates to less than half of the two-party vote [Figure 1]. Of course, Trump received less than half of the popular vote in 2016, but he still won the election because he had more than 270 votes in the Electoral College. Still, the polls currently favor Biden, and this appears to be his race to lose.

October 5, 2020

MARKET RESPONSES TO ELECTION UNCERTAINTY

Barry Gilbert, PhD, CFA, Asset Allocation Strategist, LPL Financial

Nick Pergakis, Analyst, LPL Financial

Speculation has been increasing that the November election results may be delayed or disputed, or both. A contested election might affect financial markets in several ways. Also, the news that President Donald Trump has tested positive for COVID-19 may potentially impact markets as well.

NOTE ON PRESIDENT TRUMP’S COVID-19 DIAGNOSIS

While this Weekly Market Commentary was in production, we learned that President Trump and First Lady Melania Trump had tested positive for COVID-19. First and foremost, we wish the president and first lady a swift and full recovery. Obviously the news adds a layer of uncertainty to an already contentious election cycle.

The immediate market response has been relatively mild so far. US stocks were lower at open the morning of October 2, but some assets that are perceived to be more resilient in the face of a risk-off environment, such as Treasuries, gold, and the Japanese yen, have shown no real sign of added strength early on. The news adds to the election uncertainty, however. Trump will be unable to campaign in person during the quarantine period that he observes—and maybe longer if he exhibits more serious symptoms—which possibly could hurt his reelection chances. On the other hand, the United Kingdom’s Prime Minister Boris Johnson saw his approval rating rise while he was fighting the infection.

From a market perspective, we think it’s better not to speculate on the election impact of the diagnosis. We do know two things: 1) The response to COVID-19 is very different from case to case, which means only time will tell how the virus may affect the president, and 2) the president and first lady will be monitored closely and will have access to some of the best care in the world, which improves the outlook for both of them.

August 31, 2020

ELECTION PREVIEW PART II A TRUMP SECOND TERM: UPSIDE AND RISKS

Barry Gilbert, PhD, CFA, Asset Allocation Strategist, LPL Financial

Ryan Detrick, CMT, Chief Market Strategist, LPL Financial

Jeffrey Buchbinder, CFA, CAIA, CIPM, Senior Analyst, LPL Financial

A second term for President Donald Trump would likely feature a continuation of the pro-growth policies from the first term of his administration, and importantly for financial markets, a continuation of the status quo. Markets don’t like uncertainty, and while Trump’s negotiating style has been unpredictable at times, his commitment to lower taxes and deregulation may provide a consistent, market-friendly policy environment. We look more closely at what a second term for Trump could mean for the economy and markets.

AFTER THE CONVENTIONS, ELECTION SEASON IN FULL SWING

With both the Democratic and Republican conventions now behind us and Election Day only nine weeks away, we’re following the August 24 Weekly Market Commentary analysis of a potential November win for former Vice President Joe Biden with a look at the potential market impact of a second term for President Trump.

We focus strictly on the market impact of the election, with the economy also a secondary concern, since that feeds into market impact. But our evaluation of the market impact is not a voting recommendation. There is always more at stake in elections than simply markets. These previews have been grounded in the facts, focusing on the upside and potential concerns of each candidate’s administration. If the upside doesn’t seem realistic, it can be dismissed, but we still think it’s useful to get a plausible version of the potential market upside (or lack of downside if that’s the best case) on the table.

MARKETS SIGNAL THE ELECTION REMAINS A COIN TOSS

We continue to believe the election remains a coin toss. US presidential elections consistently have been close. As discussed last week, four of the past five elections have been decided by less than a 5% margin in the popular vote, so a landslide victory for either candidate appears unlikely. Although early polling data appears to show Biden as the front runner, we are also continuing to follow market signals, which currently suggest an incumbent victory.

As we mentioned last week, how the S&P 500 Index performs in the three months leading up to the election has been a good predictor for who wins the White House, whether it reflects the state of the economy or because it signals the greater uncertainty that comes with a change in party [FIGURE 1]. A positive market over this period may signal an increased likelihood that the incumbent party may win, while stock market losses during the same period have tended to predict an opposition party win. The stock market returns in the three months leading up to the election have correctly predicted the election result every time since 1984, and 87% of the time since 1928. Since the clock started ticking on this indicator August 3, the S&P 500 has been up almost 6% and at fresh record highs, clearly favoring Trump.

August 24, 2020

ELECTION PREVIEW PART I: A BIDEN PRESIDENCY—UPSIDE AND RISKS

Barry Gilbert, PhD, CFA, Asset Allocation Strategist, LPL Financial

Ryan Detrick, CMT, Chief Market Strategist, LPL Financial

Jeffrey Buchbinder, CFA, Equity Strategist, LPL Financial

While a potential Biden presidency may mean a shift from some pro-growth policies of the Trump administration, it’s possible any negative market impact may be muted. Economic forces tend to dominate policy, though policy still matters, and historically, markets and the economy have shown little preference for either Republican or Democratic leadership. While there are risks associated with potentially higher taxes and increased regulation, and specific industries may experience a meaningful impact from policy shifts, for markets overall, there’s a real possibility that it may be just business as usual.

ELECTION FAST APPROACHING

With the Democratic convention behind us, the Republican convention this week, and Election Day only 10 weeks away, we thought it was time to take a closer look at the potential market impact of the election. Now that former Vice President Joe Biden has been formally nominated, we’ll look at the potential market impact of a Biden presidency this week. Next week, after the conclusion of the Republican convention, we’ll look at the potential impact of a second term for President Donald Trump.

Here’s how we’re going to go about it. First, as always, our concern is strictly the market impact of either party winning the White House, with the economy a secondary concern, since that feeds into market impact. But our evaluation of the market impact is not a voting recommendation. There is always more at stake in elections than simply markets. Second, each of these election previews, while grounded in the facts, will focus on the upside of each candidate, while also touching on potential concerns. If the upside doesn’t seem realistic, it can be dismissed, but we still think it’s useful to get a plausible version of the potential market upside (or lack of downside, if that’s the best case) on the table.

EARLY DATA FAVORS BIDEN, BUT WE WOULD STILL CALL IT A COIN TOSS

We believe the best way to approach the election at this point is to consider it a coin toss. The margin of victory in the popular vote has been under 5% in four of the last five elections, and in two of those elections the outcome in the Electoral College differed from the popular vote. That’s not meant to criticize the Electoral College—it just highlights how close our elections have become. A 5% difference is small enough that an election can easily swing one way or the other based on what happens in the months and weeks before the election—and there are scenarios in which even a 5% difference in the popular vote could mean a different outcome in the Electoral College.

Some of the major factors potentially supporting each candidate, in our view, include:

•             The power of incumbency favors Trump. (Presidential incumbents win about 70% of the time.)

•             Electoral College dynamics favor Trump.

•             Enthusiasm toward one’s own candidate favors Trump, although the gap is narrowing.

•             Polls currently favor Biden.

•             The president’s approval rating favors Biden.

•             The economy favors Biden, but circumstances are unusual.

•             Enthusiasm to vote against the opposite party’s candidate favors Biden, but not surprisingly,  

               that’s not necessarily a big driver of turnout.

We also follow market signals. We have often highlighted that S&P 500 Index performance three months leading up to the election has had predictive value for who wins the White House, whether it’s because it reflects the state of the economy or it signals the greater uncertainty that comes with a change in party. A positive market over that time period historically has signaled an increased likelihood that the incumbent party wins. The clock started ticking on that indicator August 3. So far the S&P 500 is up just a few percentage points, potentially favoring Trump, but volatility could quickly lead to a reversal.

Our friends at Strategas Research Partners have also put together a basket of stocks likely to benefit from a Trump or Biden presidency. Since early June, the Biden portfolio has been outperforming the Trump portfolio, though we acknowledge these stocks are driven by other factors as well.

The Senate also is being closely watched this election. If Trump wins reelection, the Republicans may very likely hold their Senate majority, currently at 53–47. With Democratic Senator Doug Jones from Alabama unlikely to hold on to his seat based on the latest polling data, Democrats would have to defeat a net of four Republican incumbents in addition to a Jones loss to take control of the Senate if Biden wins. (If the Senate vote is tied, the vice president breaks the tie.) We would put the likelihood of the Democrats taking the Senate if Biden wins the presidency at well over 50%.

July 6, 2020

ELECTION PREVIEW

Ryan Detrick, CMT, Senior Market Strategist, LPL Financial

Jeffrey Buchbinder, CFA, Equity Strategist, LPL Financial

2020 is an election year, and as we get closer to November, we expect this to replace COVID-19 and the recession at the top of investors’ minds. The makeup of Congress may influence stock market performance, and how stocks and the economy perform prior to the election may forecast who will win.

THE MAKEUP OF CONGRESS IS VERY IMPORTANT

Although all election years feel different, 2020 no doubt may be one of the most unique election years ever. We have a pandemic, a deep recession, extremely heightened partisanship, a mail-in ballot controversy, an unpredictable president, and the oldest presidential candidate ever.

Amazingly, 1940 was the last time the S&P 500 Index was lower during an election year with an incumbent in the White House. Historically, when a president has been up for reelection, it has tended to boost stocks. Stocks were down big in 2008—but President George W. Bush had finished his two terms. It isn’t about Republican or Democrat—it’s about incumbents trying to boost the economy and stock prices by the time voters go to the polls. Some good news on the economy in the coming months or progress toward a vaccine

could potentially get the S&P 500 back to positive territory for the year, after being down 30% year to date in March, and it’s possible that may help President Donald Trump’s reelection chances.

We’re often asked if stocks perform better under a Republican or Democratic president. We’d take a different view and point out that stocks have tended to do their best when we have a split Congress [Figure 1]. Markets tend to like checks and balances to make sure one party doesn’t have too much sway.