Commentary provided by John Packs, Senior Investment Officer, AIG Retirement Services
Weekly Market Performance Snapshot (Week ending November 6, 2020 & Year-to-Date)
- Dow Jones Industrial Average®: +6.9% / -0.5%
- S&P 500® Index: +7.3% / +8.6%
- NASDAQ Composite® Index: +9.0% / +32.6%
- Russell 2000® Index: +6.9% / -1.5%
- 10-year U.S. Treasury note yield on November 6, 2020: 0.822%
- Down 5.3 basis points from 0.875% on October 30, 2020
- Down 109.8 basis points from 1.92% on December 31, 2019
- Best-performing S&P 500 sector this week: Technology, +9.7%
- Weakest-performing S&P 500 sector this week: Energy, +0.8%
Past performance is not a guarantee of future results.
Equities surge as election results become clear
Stock markets rose sharply as investors grew confident that the country would avoid a prolonged period of uncertainty about the makeup of the federal government come January. While results were not immediately clear, it appeared that former Vice President Joe Biden was poised to capture an Electoral College victory in the presidential race, though lawsuits are already pending in several states with close margins. Democrats maintained a majority in the House, and Republicans look likely to hold onto a razor-thin majority in the Senate, pending the outcome of potentially two runoff elections in Georgia on January 5.
- Markets are neither pro-Democrat nor pro-Republican, but they are pro-certainty. Businesses and investors can adapt to any policy development. What’s harder to adapt to (as we’ve seen throughout the COVID-19 pandemic) is a lack of clarity about factors that may shape the future economic environment. With the outcome of the elections looking clearer, markets reacted favorably. However, a prolonged delay in finalizing results could lead to market gyrations.
- Markets typically respond well to a divided government, which requires both parties to moderate their policy proposals. According to CFRA Research, which analyzed data going back to 1944, stock markets have enjoyed their best returns when a Democratic president has been paired with a divided Congress. S&P 500 returns have averaged 13.6% in such years.
- California voters passed a referendum allowing Uber, Lyft, and other ride-sharing and delivery companies to avoid re-classifying drivers as employees. The companies promised more benefits to drivers in return. The referendum could help establish a framework for other gig-economy workers in California and beyond. Uber and Lyft stock prices rose more than 30% for the week.
Stimulus remains in question
The Senate is scheduled to return for a lame-duck session (in which current members pass legislation before the new Congress takes office in January) on November 9 and the House is scheduled to return on November 16. The size and timing of COVID-related stimulus are up in the air.
- The 10-year Treasury yield fell on the expectation that less stimulus spending will mean less U.S. debt issuance, but rose at the end of the week due to the positive jobs report. If Republicans maintain control of the Senate, it’s likely that any relief package will include less spending than it would have if Democrats had won control of the presidency and both houses of Congress.
- Even though he was not on any ballot, the election confirmed that Fed Chairman Jerome Powell—whose current term ends in February 2022—will remain one of the most important policymakers in Washington, as reduced fiscal stimulus keeps the onus on monetary stimulus to support the economy through the pandemic. In a policy statement this week, the Fed held interest rates in the 0-0.25% range, repeated its call for fiscal stimulus, and pledged to continue doing everything it can to aid the economy.
- Senate Majority Leader Mitch McConnell, who won re-election, said passing a stimulus bill will be “job one” when Congress reconvenes this month. He also indicated a willingness to accommodate Democratic demands such as more aid for states. It’s unclear how much stimulus Senate Republicans might agree to, or whether the Trump Administration and House Democrats will pick up negotiations where they left off before the election.
- The October jobs report, released Friday morning, was better than anticipated. Employers added 638,000 jobs and the unemployment rate fell a full percentage point to 6.9%. The economy has now recovered more than 12 million of the 22 million jobs lost early in the pandemic. Some policymakers point to the gains as evidence that the economy is recovering on its own and needs less stimulus. However, others argue that the slowing pace of job gains and surging virus case counts make the need for stimulus more urgent.
- In addition to stimulus, Congress and the White House will have to agree on spending levels for fiscal year 2021, which started October 1. The government is currently funded by a Continuing Resolution (CR) that expires on December 11. The two parties will have to decide whether to pass another CR, which maintains spending at current levels, or approve spending at new levels. Failure to reach agreement would lead to a government shutdown, which would create additional economic uncertainty.
Congressional priorities for January and beyond
When the new Congress convenes in January, top priorities will likely include any unfinished work on stimulus, as well as additional pandemic response.
- Coronavirus cases and hospitalizations continue to rise across the U.S., with the daily new case count topping 120,000 for the first time. Managing the economic and public health response, which might include rolling out a vaccine in the first half of the year, could consume a great deal of political energy in D.C. This may reduce the speed at which other items on the policy agenda can move.
- Members of the House and Senate in both parties have shown an increased appetite for greater regulation of big tech companies—up to and including regulations that could lead to break-ups of the biggest firms. Tech stocks rallied through the week, as investors bet that a divided government could slow the pace of regulation.
- The Supreme Court will soon hold oral arguments in a case that could impact the future of the Affordable Care Act (ACA). A decision is unlikely before spring, but a ruling that invalidates the ACA could require a fast response from Congress to minimize uncertainty in health insurance markets—particularly if the nation is still battling a public health crisis. It remains to be seen how quickly members of Congress with deeply divergent views on the ACA would be able to reach agreement.
Final thoughts for investors
Election week underscored the truth behind an old investing aphorism: Time in the market beats timing the market. The key is to work with a financial professional to create a plan that will help you meet your long-term investment goals. If you feel uncertain about your asset allocation, please speak with a financial professional.