U.S. Fixed Income

November 2020 Fixed Income Market Update

In our view, while elections have consequences, the consequences are rarely as stark or as predictable as prognosticators suggest.
November 2020

News and Nuggets: Election 2020

After a prolonged, tumultuous and unprecedented campaign cycle, the 2020 election is nearly at hand. Polling data suggests a clear advantage for Democrat Joe Biden with a 7.8% lead per RealClearPolitics (RCP) polling average (as of October 31), though perhaps due to the 2016 surprise, many polls also show voters expect President Trump will be re-elected. Prediction website FiveThirtyEight projects Biden’s chance of winning at 90%, while gaming website PredictIt.org showed a bid price of 66¢ for Biden and 40¢ for Trump to win $1.

In our November 1, 2016 market update, we observed: “Real Clear Politics averages of polls as of 10/31/2016 shows Ms. Clinton having a nearly 3% lead, though even including all four national candidates, there is over a 5% pool of undecided voters. This level of undecideds and relatively high percentage of voters indicating their preference for a third party (7%), may benefit the anti-status quo (Mr. Trump) as it did in the Brexit surprise.”

Indeed, in 2016 the third party vote never fully materialized and undecideds broke for candidate Trump. In today’s landscape, the lead for Biden is larger and fewer voters are indicating a third party vote. While polls missed in 2016, we would hope that pollsters learned from this experience and today’s polls account for the factors that drove the miss last cycle. Nonetheless, while polls have typically been accurate, they are rarely precise and the decidedly closer polling in swing states (Biden +3.1%) suggests a path, if narrow, for a Trump upset.

Over 90 million votes have been cast during early voting, with some states such as Texas, exceeding their entire 2016 voting counts already. While Republicans were originally projected to retain control of the Senate, the current RCP averages suggest a narrow Democratic take-over. There has been increasing correlation between presidential and down-ballot votes by party and we therefore expect the presidential election outcome to weight heavily on which party controls the senate.

Our view at the time of this writing is more in line with the betting markets than the pundits, i.e. Biden is a favorite, but not prohibitively so. Given it is 2020, we have to allow for the most outlandish scenario to materialize, including an uncertain or disputed outcome or the long feared electoral college tie.

Other News and Nuggets

  • Coronavirus developments remained at the forefront with global Covid-19 cases setting a record at the end of October, rising by more than 500,000 in a single day. Increasing case counts have prompted new restrictions globally, with France adopting a month-long, nationwide lockdown and Germany enforcing a partial lockdown. The U.S. set a new daily record for Covid-19 cases, topping 89,000, and many are expecting daily new cases to exceed 100,000 in coming days.
  • Minutes from the Federal Open Market Committee’s September 15-16 meeting were released in October. While referring to the ‘rapid’ economic recovery, participants were in unanimous agreement that more fiscal policy support was needed. According to the minutes, many members had included assumptions of additional fiscal stimulus in their forecasts for this year and posited that the recovery could be slower if this support was delayed. The minutes once again highlighted the expectation of strong policy accommodation and low rates for a prolonged period.

Outlook and Conclusions

In our view, while elections have consequences, the consequences are rarely as stark or as predictable as prognosticators suggest. The immediate market reaction on election night in 2016 was a sell-off in equity futures, but fairly quickly the market reversed and the reflation or ‘Trump trade’ was on. Conversely, while Republicans were considered the more energy friendly party, the outcomes for energy investment have been underwhelming as it has been one of the few investment grade and high yield sectors with negative excess returns during the Trump presidency. While some policies will be contingent on election outcomes, we do believe that both parties would be amenable to passing additional fiscal stimulus on their terms. To date, this fiscal stimulus appears to have been delayed by partisan gamesmanship. Moving past the election will remove an obstacle to a further stimulus package, with election results steering the shape of that package. The election is the main focus today, but while that will (hopefully) be resolved soon, the uptick in global coronavirus cases and the decision to re-lockdown economies presents new challenges for an already challenged global recovery. There are also signs of lasting damage to the economy from earlier this year, though more recent U.S. economic data has continued to improve. As these trends work their way through, we continue to find relative value at the security level, while being more tempered in overall risk allocations.

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Disclosures

This is not intended to serve as a complete analysis of every material fact regarding any company, industry or security. The opinions expressed here reflect our judgment at this date and are subject to change. Information has been obtained from sources we consider to be reliable, but we cannot guarantee the accuracy. This publication is prepared for general information only. This material does not constitute investment advice and is not intended as an endorsement of any specific investment. It does not have regard to the specific investment objectives, financial situation and the particular needs of any specific person who may receive this report. Investors should seek advice regarding the appropriateness of investing in any securities or investment strategies discussed or recommended in this report and should understand that statements regarding future prospects may not be realized. Investment involves risk. Market conditions and trends will fluctuate. The value of an investment as well as income associated with investments may rise or fall. Accordingly, investors may receive back less than originally invested. Investments cannot be made in an index. Past performance is not necessarily a guide to future performance.

Taplin, Canida & Habacht, LLC is a registered investment adviser and a wholly owned subsidiary of BMO Asset Management Corp., which is a subsidiary of BMO Financial Corp. BMO Global Asset Management is the brand name for various affiliated entities of BMO Financial Group that provide investment management and trust and custody services. Certain of the products and services offered under the brand name BMO Global Asset Management are designed specifically for various categories of investors in a number of different countries and regions and may not be available to all investors. Products and services are only offered to such investors in those countries and regions in accordance with applicable laws and regulations. BMO Financial Group is a service mark of Bank of Montreal (BMO).

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