So here we are. A week after a national election and we still don’t know the final results in a few states. But the market has made some assumptions — it always does.
On October 11th I wrote a column for USA TODAY entitled, “Three reasons stocks will probably rise no matter who wins the presidential election.” I suggested that manufacturing is on the rise in the U.S. as companies onshore factories (there have been almost 200 companies who have done so in 2020), technology is driving growth and productivity (good for corporate profits), and that we may be seeing a resurgence in global growth. Add to that massive amounts of money sitting on the sidelines and you have a pretty positive environment for stocks.
Jessica Menton of USA TODAY summarized last week as follows: “Stocks closed out their best week since April on Friday, driven by the potential for more gridlock in Washington even as the winner of the White House is still unknown.” A week prior who would have thought?
So now that we know the election results, where should investors be putting their money?
Below are some suggestions, with the standard caveat: Only you know your own risk tolerance, investment objectives and time horizon. For my purposes, I try to own stocks I can hold for a lifetime. You may be more nimble and short-term focused.
If things stand as they appear on Monday, we will assume a Biden presidency, a Democratic House (with a modestly narrowed majority) and a Republican (barely) Senate.
This may mean that massive stimulus is off the table with a narrower bill likely to be implemented; the Biden campaign’s tax plan (corporate tax hikes and tax increases on capital gains, dividends) is unlikely as proposed. Both of these assumptions have profound implications for individuals, small business and large corporations.
So where should 401(k) investors focus?
• First and foremost, don’t abandon your allocation to stocks. While things may get a little choppy as we sort through the recounts and legal challenges, stocks still represent good value in the long-term. Third-quarter earnings have exceeded expectations, dividend increases are accelerating — which reflect managements’ optimism — jobs are coming back, albeit slowly, and the purchasing manager indices continue to surprise to the upside, supportive of GDP growth.
• Re-assess your asset allocation. Does your current allocation reflect your intended allocation? Stocks have performed decently in 2020, and so have bonds as interest rates hit historic lows. If you think the odds of interest rates rising are high in the near-term you may want to trim back your bond holdings (remember bond prices decline when interest rates rise). Check allocation to global securities — if growth returns to the rest of the world, does your current allocation seem right?
• Consider your sector allocations. With interest rates still hovering at historical lows, mortgage rates remain attractive. COVID-19 has increased the demand for single-family homes in the suburbs. Housing and housing-related stocks have run but may be in the early innings of a sustained expansion. Technology continues to drive productivity in companies as diverse as Microsoft and McDonald’s. Again, the sector has seen significant moves but there are some sustainable winners in the various underlying industries comprising technology. Think beyond FAANG if you are so inclined. Use your own insight based on what the political parties are signaling. Do you want to own oil energy or renewables, banks or fintech?
These are things you should be analyzing in any political environment, which basically makes my point: Don’t invest your politics, stay the course for the long-term and frequently re-assess your objectives. If you do those three things you will retire well.