Thoughts on the Election

So, what happens to the markets on November 3rd? It’s likely to be noisy with the first moves being quite reactionary. Focusing too much on this event, even if the outcome is ugly, is not a great use of one’s time.  Here are the things that we think will cause more substantial moves in the next several months: ​

1. Stimulus

This may be the reason why anybody has a stock portfolio that’s not down significantly in 2020. Without it we’d be in a real mess. Most financial experts and politicians believe that another stimulus package is necessary for the nation to avoid a worsening financial and social crisis.  

This view is shared, through differing lenses, by both political parties, so I think we’ll have more stimulus. It’ll be bigger if the Democrats win the White House and the Senate; potentially a $3T deal with aid to the States and Municipalities. Republicans will likely want to stick with something like the $1.9T offer we saw earlier this month. Either one will help. The outcome of the election may impact the timeline for additional stimulus.
​
Mixed scenarios, like a Biden win and a Republican Senate, or a Trump win and a Democratic Senate would add some twists, but I believe they will still result in a new package. The longer the process takes, the more nervous the markets will be.  ​

2. Stock Valuations

Many of the stocks that have driven the indices higher are at extreme valuations by historical norms. No one says they can’t go higher, but it’s likely that there will be a reckoning, and some have a long way to fall before they’ll become a good buy. On the bright side, many individual stocks are offered at more reasonable valuations and may find some upside with stimulus and a solution to the health crisis.  ​

3. Vaccine or Cure

Not much to say here other than when it happens it will be a good thing. We’ll be able to begin building our post-COVID economy and maybe find a new group of winning companies. This will be very helpful to “main street.”

Looking out past the above topics, we must address another collection of challenges, too long to go into much here, but I’ll list a few: 

All of that stimulus comes at the cost of massive debt. How we deal with this over the next decade will determine how we fare as a nation and as investors. It’s looking more and more like we are swallowing the Magic Pill of “Modern Monetary Theory” leaving little choice but to have faith inflation and interest rates will be tamed over time. This will impact our long-term growth prospects, potentially in a negative way.  

Taxes are likely to change; sooner if Mr. Biden is elected and the Senate falls to the Democrats this year. You can look up Biden’s thoughts on taxation on his campaign website. It mostly focuses on high earners, the wealthy, and corporations. This will change spending behaviors in unanticipated ways and is likely to slow growth to some degree. It’s also likely that all working Americans will see a tax increase in the future as we deal with the aftermath of additional debt generated by COVID and fiscal spending.   

Financial markets face many challenges, but we also believe that they present opportunities. For instance, as we mentioned in our most recent quarterly letter, valuation spreads between value to growth stocks, and small cap to large cap stocks has reached historic highs. So even with the broad markets being priced to perfection, investors that are willing to do their homework (like us) can find opportunities in companies and asset classes that have not participated to the extent as the “glamour” stocks have. Our disciplined process and focus on risk management will allow us to navigate the equity markets, no matter the victor of next week’s election. 

Humbly yours, the Cairn Team

​