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While the level of uncertainty surrounding the US presidential election may have narrowed in recent weeks, there are still many investors who, given the upset of the 2016 election, have preferred to sit out the campaign. History tells us that, on average, US equities rise in the month after the election, although the strength of that rise has varied. In the table below we show returns over the last 70 years under different political scenarios.
Assuming an uncontested election result, and therefore political certainty, investors may want to ensure their US equities holdings are at least up to weight, especially as any announcement of a successful vaccine or new fiscal stimulus package could cause a sharp bounce in the markets.
We believe US equities continue to offer the safest haven in the near term (relative to other regions). US equities are supported by the bias towards corporate quality, in particular balance sheet strength, which we believe is helpful in the more difficult economic environment. There are also important defensive benefits from the country’s huge domestic market and diversified economy as well as the composition of its corporate structure.
US employment has continued to rebound while consumers remain resilient as evidenced by the strong consumer confidence index and positive retail sales. Monetary policy remains accommodative and, while additional fiscal stimulus has disappointed so far, there remains optimism that a package can be agreed upon after the election. Outside the US, the picture is a little more mixed.
In the longer term, US equities continue to look like a relatively attractive asset class. There has been a strengthening of structural, technological trends during the COVID-19 crisis that could benefit many industries. There is also a reasonable amount of slack in the economy, which means it could run at a faster pace than would normally be expected over next few years. Furthermore, there is an opportunity for companies to increase efficiency through a greater reliance on technology.
From a valuation perspective, historically low bond yields offer a cushion against elevated uncertainty, allowing companies to access financing more easily.
SPDR has a wide range of funds providing exposure to US equities, with a choice on size, factor, ESG and sector. Here we highlight a few of the options:
The S&P 500 has recovered strongly from the lows of March, but the strength of corporates, supported by the factors mentioned earlier should help further gains. In the short term, State Street Global Advisors prefers large cap over small cap equities, given their quality bias and performance being helped by the large weighting in Technology companies. Structural growth trends assessed by all the FAANGs, including those in technology, should continue to drive earnings and sales expectations with contributory momentum and macro factors offsetting any concern over valuations.
The US mid-cap index has much greater cyclical exposure than the S&P 500, an example being 18% weight to Industrials, containing engineers and machinery manufacturers that could meet with higher demand on any fiscal package targeting physical infrastructure. According to State Street Global Advisors, mid-cap stocks can occupy the sweet spot in the market with higher earnings growth, although accompanied by higher volatility (though not as high as with small caps).
In the near term, an improvement in the relative health of small cap balance sheets, when considering operating earnings versus free-cash-flow, has helped the Russell 2000 look more appealing than earlier in the COVID-19 crisis. Looking out three to five years, we forecast higher returns from small caps than large or mid caps (6.1% versus 5.6% for US large caps and 5.8% for mid caps); however, we would expect a higher standard deviation of returns.1
Sectors are often one of our favourite investment solutions, and never more so than when volatility driven by intra-sector dispersion is high.
Each election scenario poses different implications for each sector; please refer to our recent article for a full summary. Some of these implications may well be priced in before the election result is announced, but the speed of new legislation may not take the normal path given the importance of first addressing health and related economic problems. There will be opportunities in terms of over-reaction, which we cannot predict.
In the Q4 Sector Compass, our Sector Picks consider not only the possible impacts of the election, but also the reaction to other growth drivers in the market and possible avoidance of certain risks. The sectors we considered were Utilities, with its potential benefits from renewable energy; Health Care, given demand for COVID-19 treatments; and Technology, in light of its importance in facilitating our working and social lives in the current environment.
SPDR offers a range of ETFs that allow investors to access exposure that can help them to position around the US presidential election. To learn more about these ETFs, and to view full performance histories, please follow the links below:
Sources: Bloomberg Finance L.P., for the period 22-29 October 2020. Flows are as of date indicated and should not be relied upon as current thereafter.
1 Source: State Street Global Advisors, as of 30 September 2020.
Marketing Communication. For Professional Client Use Only.
For Investors in Austria: The offering of SPDR ETFs by the Company has been notified to the Financial Markets Authority (FMA) in accordance with section 139 of the Austrian Investment Funds Act. Prospective investors may obtain the current sales Prospectus, the articles of incorporation, the KIID as well as the latest annual and semi-annual report free of charge from State Street Global Advisors GmbH, Brienner Strasse 59, D-80333 Munich. T: +49 (0)89-55878-400. F+49 (0)89-55878-440.
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2015149.148.1.EMEA.INST
Exp. Date: 31/01/2021