As the final push to the November elections begins, people are wondering what comes next. The coronavirus pandemic has already created widespread uncertainty, and the elections themselves could bring even more change with impacts on tax and spending policies in particular. After all, aside from the presidential race, there are 435 House seats and about a third of Senate seats up for grabs, not to mention all the state-level elections. What does all of this mean for investors?
Here, Paul Christopher, CFA, Head of Global Market Strategy at Wells Fargo Investment Institute, shares his thoughts on how investors can prepare for what may happen next.
Consider staying the course for now
Campaign promises—whether from the incumbent or the challenger—don’t always turn into policies. This year’s many congressional contests and the internal disagreements within both parties are wild cards.
Christopher says, “Try not to extrapolate from campaign promises to policies. Even if one can guess the presidential outcome, it is much more difficult to guess how the different groups within parties will balance power among themselves, or what the legislative priorities are going to be.”
For the long-term investor, changing anything based on political speculation can be risky. “Don’t jump to conclusions about elections, especially based on polls,” Christopher says, “and especially if investors are sensitive to tax consequences.”
Be aware of potential challenges
There are potential negative effects on the market no matter who wins, including low interest rates for the indefinite future. “That could be a policy decision potentially supported by either winner, and that could hurt investors who rely on interest income,” he says.
A Democratic sweep, Christopher says, might mean higher corporate taxes or more taxes on personal wealth, possibly affecting some affluent investors. New regulations could affect small and midsize companies that don’t have the resources to meet them. “Those things affect affluent investors via the returns that are available in the market,” potentially decreasing dividends and stock prices, Christopher says. “But we also expect new spending programs intended to offset the negative economic consequences of higher tax rates. These spending programs could be targeted to particular projects (e.g., infrastructure and health care), and may benefit particular sectors. New investment opportunities are likely to arise.”
Watch and wait for opportunities
Even if you correctly predicted the winner, Christopher says, “you still don’t know how or if the policy proposals will turn into laws.”
Since it takes time to implement new policies, consider waiting for a clearer picture to emerge before deciding what to do next, he says. As you get a better sense of where government spending and policies are headed, Christopher recommends thinking about your investments this way: “Which sectors are government policies going to favor, and when do I want to participate?”
Consider the common ground
There are a few sectors where Christopher believes Republicans and Democrats will find broad agreement: infrastructure, healthcare, internet infrastructure, and income support programs.
He says infrastructure spending would help the materials and industrials sectors, including companies that make construction equipment, construction companies themselves, and companies that make asphalt and concrete. Improving internet infrastructure could also benefit companies that produce the cables and towers.
Governmental attention on the healthcare system, spurred in part by the coronavirus pandemic, might result in expanded research and development and speedier drug approvals. And additional government stimulus payments to individuals because of the coronavirus pandemic could encourage spending and perhaps create investment opportunities in other sectors.
Make a plan—and stick to it
Many investors are holding onto a lot of cash after selling near the bottom during the stock market crash in March 2020. Christopher says it is time to rebalance. “Make a plan with your financial advisor to put that money to work gradually in bits and pieces,” he recommends.
Put the plan in writing or make a verbal agreement to take certain steps no matter who wins—and don’t stray from it based on emotion. Remember: “You can always make adjustments based on who wins the election and what the legislative calendar begins to look like come February,” he says.