Election Questions From the Mailbag

Editors’ Note: Our political commentary is intentionally non-partisan. We favor no political party nor any candidate and assess political developments solely for their potential economic and market impact.

With Election Day now a week away and mail-in voting in full swing, investors’ nerves seem to be on edge, to put it mildly. To help keep both your fears and hopes in check, here is our take on some of the most common questions we have encountered.

What will the results mean for COVID restrictions and reopening? President Donald Trump winning re-election means everything opens, and former Vice President Joe Biden winning means a big “closed” sign, right?

Nope. That presumption seems based on each candidate’s rhetoric toward the virus and the various containment measures in place to combat it. However, the Executive Branch has very little power over any of this, as the vast majority of restrictions happened at the state and local levels. That is why reopening happened gradually and unevenly across the country. It is why the meaning of the various “phases” are disparate across state lines. As we all witnessed this spring, the White House can set out a general framework for states and counties to follow, including case count criteria for opening more stores and services, but the federal government is limited in its power to either lift or enact sweeping restrictions. In this country, for better or worse, it is up to the local authorities. So, don’t presume the election going one way or the other dictates how many restrictions we will have this autumn and winter and what that means for stocks. It is a lot more complicated than that.

What happens if Biden wins and Democrats take the Senate and abolish the filibuster—doesn’t that cut against your thesis that returns will likely be above-average in the inaugural year as gridlock relieves investors’ fear of radical change?

This is a question about the phenomenon we call the Perverse Inverse: Stocks’ tendency to deliver below-average returns in the election year if a Democrat wins the presidency and above-average returns in the inaugural year—with the opposite (above-average election year and more muted inaugural year) if a Republican wins. This is largely a function of sentiment. Due to biases and campaign talking points, investors generally view Republicans as pro-business and Democrats as bad for markets. Reality doesn’t support this, as both parties have enacted good and bad policies from an economic standpoint. They have even done so in an overwhelmingly bipartisan manner (Exhibit A: Sarbanes-Oxley.) But those are the biases. As a result, fears of a more active government picking winners and losers tend to diminish election-year results when Democrats win. But in the inaugural year, those fears fizzle as the president moderates and encounters gridlock. Even when the president’s party holds both houses of Congress, the administration usually gets at most one or two big things done due to intraparty opposition. The inevitable horse-trading waters down major change, and investors’ relief buoys stocks.

Some worry this time will be different if Biden and the Democrats win due to the party’s progressive wing’s threats to abolish the filibuster on Senate legislation, meaning a very active legislature will pass loads and loads of bills, stirring uncertainty. In our view, this is exactly the kind of sentiment that gives the Perverse Inverse its power, and that the fear is quite common suggests worries are getting baked into prices now, potentially teeing up a big relief rally when they don’t come true—which, in our view, they aren’t likely to.

One path to abolishing the filibuster is to change Senate Rule 22 (the cloture rule that requires 60 votes to curtail debate). But this would be … ummm … hard, considering it takes a two-thirds majority to alter it. If you can’t get 60 votes to advance a bill, how likely is it you can get 66 to alter rules eliminating the filibuster? The second path is the one used in 2013 (by the Democrats) and 2017 (by the Republicans) involving judicial appointments—the nuclear option. This is a far easier process that can be achieved with a simple majority. Yet even if the Democrats take the Senate, this isn’t assured to happen. Neither party looks at all likely to get that huge of a majority. Yes, more seats than usual are in play, but the margins are close, and neither presidential candidate has amassed the huge following necessary to generate big coattails. That means invoking the nuclear option could take a uniform, party line vote. Could that happen? Sure it could. But many Democratic Senators have expressed skepticism about such a change in the past, which is a factor worth considering.

Regardless, even if they did eliminate the filibuster, that doesn’t mean extreme legislation is coming. Consider: They had a supermajority in President Obama’s first two years and yet many campaign promises fell by the wayside. The Affordable Care Act and Dodd-Frank Wall Street Reform and Consumer Protection Act loom large in memory, but both were shadows of their initial proposals. Never forget that Senators are politicians, and their primary goal is to be re-elected every six years. There are factions in both parties that play to their home states, which often means legislation gets watered down or stalls without action by the opposing party.

What about Tech? Regardless of who wins, it seems like big changes and regulations are coming down the pike. Both parties are talking up a storm, and the Department of Justice just filed its first anti-trust lawsuit against one of the Big Four.

Our viewpoint hasn’t changed since Fisher Investments Research Analysts Tim Schluter and Warner Jacobs took this question on a year and a half ago. While more regulation, legal challenges and fines are possible, the surprise power is pretty much nil. Investors haven’t been buying Tech and Tech-like stocks with blinders on—they are well aware of all the regulatory threats. The market is sending a pretty powerful signal about this alleged threat.

Antitrust lawsuits take years to play out. The AT&T case, which resulted in Ma Bell’s breakup, launched in 1974 and wasn’t resolved until 1982. Shareholders made out fine, with the split company delivering nice returns. More recently, the DoJ launched antitrust proceedings against Microsoft in 1998, and the court ruled against the Tech giant three years later. The company appealed but eventually settled and paid a fine, and aspects of the lawsuit lingered for over a decade all told. The Tech bubble’s implosion and related bear market happened during that span, obviously impacting Microsoft’s returns, but overall the antitrust case had no discernible impact on long-term returns.

Antitrust threats usually unfold slowly and publicly, sapping their surprise power. Regulatory shifts could present a bigger threat, but all the attention paid to it renders that somewhat unlikely too. This is all assuming any of this chatter lasts past November. After all, campaign talk has a funny way of fizzling.

If Biden wins, should we ditch all our fossil-fuel related stocks and go all in on renewables?

Well, in a word, no. For a few reasons. One, the Executive Branch doesn’t have power to unilaterally cancel an entire industry. Congress could theoretically ban fracking, we guess, but there are a lot of Democratic representatives and Senators from shale-rich states, and they are probably savvy enough to know that if they vote to kill their state’s industry and put their constituents out of a job, they themselves will probably be out of a job when the next vote comes around. Again, first principles: Politicians are politicians.

Plus, the renewables/fossil fuels divide isn’t as binary as many think. Many of the world’s biggest Energy companies are already branching out beyond oil and gas. In our experience, the market tends to sniff out long-term trends long before politicians try to force them on society.

More broadly, this question smacks of the old fallacy that a given candidate is good for some sectors and industries and bad for others. President Trump, for instance, was supposed to be super bullish for coal and aerospace & defense. But coal’s arch nemesis wasn’t the previous administration—it was natural gas, which was cheaper and cleaner burning. The market sidelined coal, and that continued under President Trump. Aerospace & defense, meanwhile, has underperformed the S&P 500 massively since Election Day 2016.^[i] It had a short burst out of the gate but fizzled fast. Beware anything you read about “Trump stocks” and “Biden stocks”—it all amounts to widely discussed opinions, which are often wrong and, even if correct, almost surely priced in by now.