The Election and Markets: 5 Key Points to Remember

Stocks stumbled through the week, and markets booked their largest five-day decline since March, pulled lower by big tech names following a raft of earnings — which were quite strong. But before we dive into the week’s takeaways, let’s address the elephant (and donkey) in the room: the election.

Election Day is tomorrow, which isn’t exactly news given tens of millions of Americans have already voted. No doubt, we’re entering the week with a lot of uncertainty about the next four years in this country. But if you’ve followed our commentaries for the past month or so, you know we’ve been adding important context around potential short-term market volatility. We think it makes sense to reiterate a few key points we’ve been emphasizing:

• Try not to overweight politics in your portfolio: Politics and policy should always be factored into an overall investment equation, but presidential elections aren’t a reason to amplify their influence. Presidents, history has shown, are not an absolute positive or negative for markets. In fact, stocks, on average, rise under both Republicans and Democrats.
• Stick with your plan: There are risks and uncertainties that come with any political restructuring, but stay committed to the process and the longer-term financial plan you’ve built with your financial advisor. This is the time to rely on that planning.
• Policies are never cut and dried: Both candidates offer different visions for their presidency. But the end results of those policies aren’t always so cut and dried. There’s rarely pure upside or downside with any reform or policy. Portfolio managers Jeff Nelson and Matthew Stucky recently shared some of that deeper nuance in their elections and markets outlook.
• Look past knee-jerk reactions, and watch the fundamentals: No doubt, there could be heightened volatility this week, but we think it’ll be short-lived. The economic data have improved, and we expect some major developments on the vaccine front this fall and winter. We’re hitting the key recovery benchmarks we outlined in spring.
• No surprises from the Fed: No matter who wins the election, the Fed will remain an economic and market "ally" and will wait until the economic cycle is firmly in its final stage before even contemplating raising rates. We can gather from Fed Chair Jerome Powell’s comments that rates may stay where they are for a few years.

I’ll also be speaking Wednesday with Northwestern Mutual Chief Investment Officer Ron Joelson to break down Election Day developments. You’ll find a link to that video here once that’s live.

Now, let’s dive into key takeaways from last week and get you ready for the week ahead.

WALL STREET WRAP

U.S. GDP Booms: The U.S. logged its sharpest rise in annualized and single-quarter GDP of all time in the third quarter. GDP jumped 33.1 percent at an annualized rate and 7.4 percent quarter over quarter — a shade faster than expectations. GDP recovered from an equally historic contraction from Q1 to Q2, and, superlatives aside, the economy is still 3.5 percent smaller than it was at the end of 2019 before the pandemic hit. Still, Q3 GDP reflects the V-shaped recovery we’ve been tracking in a host of other economic indicators through the quarter. The recovery isn’t complete in terms of GDP, but we’re getting closer.

Of course, the big question heading into the fourth quarter is whether the notable rise in coronavirus cases here and abroad and uncertainty about stimulus and politics will prove to be headwinds to the recovery.

Big Earnings from Big Tech: Amazon, Facebook, Alphabet, Microsoft and Apple all reported earnings growth and showed the resiliency of their businesses this week. Except for Apple, which had a delayed 5G iPhone launch, revenue and earnings trends were far above market expectations. But strong earnings didn’t translate to higher stock prices for these companies, which represent a seventh of the S&P 500’s market value.

“Strong fundamental performance doesn’t always lead to strong stock responses, especially in today’s market environment,” said Matt Stucky, Northwestern Mutual equity portfolio manager. “Expectations were high for these companies into the earnings release, and only Alphabet (Google) was met with a positive stock reaction.”

Some other highlights: Amazon added 400,000 employees in 2020 and now employs over 1.1 million workers. Visa and Mastercard earnings showed that consumer spending continues to recover, but travel-dependent, cross-border transactions still have a long recovery ahead. Consumer staples giant Procter & Gamble said organic sales rose 9 percent and raised guidance as consumers flocked to brands they know and trust. Overall, 86 percent of S&P 500 companies beat earnings, which is the highest level seen for any Q3 in more than 20 years.

“One of the many things we have seen during the pandemic is the strong have become stronger,” said Jeff Nelson, Northwestern Mutual equity portfolio manager.

From the Health Sector: COVID-19 has taken the health care sector by storm; and while we’ve covered major vaccine developments, our Northwestern Mutual health analyst and associate portfolio manager Jack Gorski was watching a few other virus-related trends in the sector, from device makers to insurers.

“If you listen in on these calls, you will notice that most management teams are confident in hospitals’ abilities to manage COVID-19 cases and procedures, which builds some optimism going forward,” said Gorski.

Diversified medical equipment manufacturers generated growth from COVID-19 tests alone, even as core business segments declined. Most commentary from device makers suggest they are in the ballpark of 90 percent pre-pandemic procedure volume, with this rate returning to growth sometime in Q4 — pending any patient restrictions stemming from the virus. Managed care companies rode a tailwind as they continued collecting premiums without paying out as much in the form of claims. Some of this additional value was passed on to customers to cover out-of-pocket COVID-19 expenses for everything from testing to ICU stays.

THE WEEK AHEAD

Keeping It Simple This Week: Obviously, the election and the market’s reaction to it will be the big focus this week. We’ll certainly have commentary following Election Day and discuss how the market digests the results. So, we’ll keep it simple for the week ahead. Amid election news, we’ll also check in on the monthly unemployment numbers, the ISM manufacturing and services indexes and the Federal Reserve’s regular meeting and news conference.

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