Special Report - Post Election 2020 - Released 11/11/20

Key takeaways

• Historically, divided government has been a positive for financial markets.
• An effective COVID-19 vaccine can return the global economy to a more normal environment during 2021.
• An economic recovery could benefit U.S. small and mid-cap stocks and international stocks.
• Support from the Federal Reserve may provide attractive opportunities in certain segments of the bond market.
• After the unpredictable events this year, it’s clear that time in the markets is more impactful than timing the markets.

In our most recent Market & Economic Outlook, we stated there were signs of an economic recovery underway but with risks lurking beneath the surface. We also expected political gamesmanship along with fears of a third wave of COVID-19 infections to drive investor sentiment as we headed into the U.S. election.

Now, the election results are coming into focus and we’ve received more positive COVID-19 vaccine updates, we believe we have more clarity on the impacts to financial markets. A divided government and a successful vaccine are likely to provide a significantly different investment environment to consider.

Gridlock has been good

This was one of the most closely contested elections in history, and it appears, the country remains divided. Although legal challenges to the election result are likely to continue, the Associated Press has declared a Democrat President and a majority in the House of Representatives, albeit at a narrower margin than before the election. At this point, the Associated Press indicates Republicans are likely to keep their majority in the Senate.

Historically, a divided federal government has been a positive scenario for financial markets, as it likely takes the most extreme policy changes off the table. In fact, according to Capital Group, the S&P 500 Index average annual return has been strongest since 1933 with a divided congress, which many are predicting will occur in January of 2021 (Figure 1).

Sweeping changes to tax rates are unlikely in the near term given the likelihood of political gridlock. However, we may see the expiration of the Tax Cuts and Jobs Act in 2025 if government remains split. Corporate taxes are not scheduled to revert, but individual tax rates would increase. We continue to monitor the impacts on financial markets of changing tax laws.

Vaccine on the way

We also continue to receive positive news on the race for a COVID-19 vaccine. Recently, Pfizer and BioNTech SE announced the vaccine they are developing prevented more than 90% of infections in a study of thousands of volunteers. We feel it is looking more and more like approval of a vaccine will occur later this year. If the vaccine can be proven effective, the U.S. economy could return to a more normal environment during 2021.

Economic recovery continues

A new fiscal stimulus package remains a possibility and, in our view, would greatly enhance the economy’s ability to weather the coming months until restrictions are finally lifted. In January, the new Congress will be inheriting an economy showing signs of strength. Existing residential home sales rose in September at the highest annual rate since 2006. New residential home construction permit data continues to be robust. Total retail sales in the U.S. have recovered from the April lows despite the pandemic. The U.S. personal savings rates have hit records in 2020 (Figure 2), and there appears to be pent up demand as we believe people will be anxious to go out and spend.

As the world moves closer to reopening, we are likely to see cyclical sectors perform better. An economic recovery powered by a COVID-19 vaccine and additional government stimulus could benefit small and mid-cap stocks. They remain attractive in our view relative to large caps.

We expect a return to globalization and believe trade wars are likely to moderate. President-elect Biden is less likely to implement tariffs when dealing with China. However, it is unlikely the new administration will want to appear weak in trade negotiations. We believe less uncertainty regarding foreign trade could benefit international stocks. We believe non-U.S. stocks look attractive due to attractive valuations, cyclical exposure in an eventual global recovery and possible depreciation of the U.S. Dollar.

Federal Reserve support

One thing that has remained constant during 2020 is the support the Federal Reserve has provided to financial markets. They have succeeded, so far, in restoring confidence to the markets, keeping interest rates low and enabling credit to flow freely. The Fed is likely to continue their accommodative monetary policies and has stated they are committed to extending their asset purchase program indefinitely. The Federal Reserve’s balance sheet continues to grow currently at $7 trillion in assets. (Figure 3).

Within fixed income markets, we continue to see value in preferred stocks, floating-rate loans, and emerging market debt. These carry higher yields than U.S. investment grade bonds, but are not traditional bond investments, and may contain additional risk. The Fed’s aggressive monetary actions could provide a favorable environment for these types of securities.

Time in the market, not timing the market

In our view, it is better to avoid short term speculation on near term events, and we remain confident in our stance to avoid timing markets heading into elections. Markets may continue to experience fluctuations as COVID-19 cases continue to rise, or if we experience vaccine distribution roadblocks. But after the unpredictable events investors have experienced over the last few weeks and quarters, it’s clear time in the markets is more impactful than timing the markets.

Our team continues to believe the best approach is to focus on personal investing goals instead of market headlines. A trusted financial professional can help you establish a plan able to withstand these changing times.

COUNTRY Trust Bank wealth management team

• Troy Frerichs, CFA - VP, Investment Services
• Jeff Hank, CFA, CFP® - Manager, Wealth Management
• G. Ryan Hypke, CFA - Portfolio Manager
• Weston Chenoweth - Investment Analyst
• Molly Ruddy - Investment Analyst

• Chelsie Moore, CFA, CFP® - Director, Wealth Management & Financial Planning
• Kent Anderson, CFA - Portfolio Manager
• Jonathan Strok, CFA - Portfolio Manager
• Jamie Czesak - Investment Analyst