Sleeping with an elephant
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We are less than six months out from one of the most impactful political events in the world, the U.S. elections. Every four years, the political tides in the U.S. have the power to influence the global economy and the investment markets. And of course, it can have implications for Canadians.
This U.S. influence on Canada was famously quoted by former Canadian Prime Minister Pierre Trudeau when he said "Living next to you is in some ways like sleeping with an elephant. No matter how friendly and even-tempered is the beast, if I can call it that, one is affected by every twitch and grunt."
To help highlight some of the key considerations and implications of "the elephant" for Canadian investors, we recently aired a TDAM Talks Podcast that featured Michael Craig, Managing Director, Head of Asset Allocation & Derivatives and Christian Medeiros, Vice President, Portfolio Manager, Asset Allocation of TD Asset Management Inc. who collectively oversee more than $110 billion in solutions for our clients. While the podcast is jam packed with great insights, for the convenience of our readers, we have distilled it down to a few key messages around potential investment implications.
The importance of taking a long-term view
Before we dig into the potential investment implications of the election, it's important to note that, historically, markets have largely been unaffected by U.S. Presidential election outcomes over the long-term. The direction of the market, no matter the outcome, is more likely to be driven by fundamental factors like interest rates and corporate earnings. Sure, the possibility for short term market gyrations based on headlines and political rhetoric can be expected, but longer term, asset values and returns are largely driven by fundamentals.
Fixed income
A Donald Trump victory for the Presidency may cause a knee jerk sell off of fixed income and a Trump sweep would mean that his 2017 tax cuts will be extended. On the flip side, he could also cut government spending or raise revenues through tariffs. All in all, it would likely be bad for fiscal sustainability. A victory for Joe Biden would not be much better for the fiscal picture. While he is unlikely to extend tax cuts for high income earners (and may increase corporate taxes) any savings are likely to be spent on policy priorities such as the child tax credit. In either case the U.S. is likely to continue to see higher than normal deficits.
Equities
Initially, a Trump sweep would likely lead to an equity market rally. Investors would be happy about the likelihood of an extension of the tax cuts that expire next year while possibly expecting even more tax cuts. Investors would also be looking for deregulation, especially in the Energy and Financial Services sectors. Over the course of the Presidency, this can moderate, particularly in the face of a trade war due to Trump's proposed tariffs. A Biden victory would likely see a continuation of his first term policy preferences, favouring green energy and onshoring, with a continued strict regulatory regime across a host of sectors. It's important to note that a policy preference for certain sectors doesn't necessarily mean outperformance over the course of a Presidency as many other factors will impact sector performance.
Alternatives
Alternative asset classes tend to be comprised of very long duration holdings and the transition green economy is unlikely to change under either candidate. However, Trump does not see Biden's green spending initiatives favourably, so with a Trump win we could expect some headlines around funding for electric vehicles and renewables. Regardless, these assets will likely continue to provide stability in portfolios and have an important place, whether it's Trump, Biden, a unified Congress or a divided Congress.
Key Message
This isn’t the first big election, and it won't be the last and there are positives and negatives to any of the potential outcomes. But at the end of the day, policy is just one input to a much larger mosaic from an investment standpoint. There are a lot of other considerations that matter much more than policy, and whether it's a Democrat or Republican President, a majority or split Congress, or any other combination, there's not a massive difference in performance results over the long term.
The information contained herein has been provided by TD Asset Management Inc. and is for information purposes only. The information has been drawn from sources believed to be reliable. The information does not provide financial, legal, tax or investment advice. Particular investment, tax, or trading strategies should be evaluated relative to each individual’s objectives and risk tolerance.
Certain statements in this document may contain forward-looking statements (“FLS”) that are predictive in nature and may include words such as “expects”, “anticipates”, “intends”, “believes”, “estimates” and similar forward-looking expressions or negative versions thereof. FLS are based on current expectations and projections about future general economic, political and relevant market factors, such as interest and foreign exchange rates, equity and capital markets, the general business environment, assuming no changes to tax or other laws or government regulation or catastrophic events. Expectations and projections about future events are inherently subject to risks and uncertainties, which may be unforeseeable. Such expectations and projections may be incorrect in the future. FLS are not guarantees of future performance. Actual events could differ materially from those expressed or implied in any FLS. A number of important factors including those factors set out above can contribute to these digressions. You should avoid placing any reliance on FLS.
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