What's next for investors?


Anthony Saglimbene, Ameriprise Global Market Strategist – Ameriprise Investment Research Group

A person uses a tablet to view market performance data

 As of Nov. 16, 2020

Key Points

  • While not official, newswires have called the presidential race for Joseph R. Biden Jr.
  • The path for stocks looks positive in 2021, in our view.
  • Investors should balance investment opportunities across cyclical and high-growth areas.

Data source: FactSet1

 

While President-elect Joseph R. Biden Jr. has communicated several key actions for his administration, he has committed to making the coronavirus one of his top priorities and announced a newly appointed COVID-19 advisory council.

In the week heading into the election, the S&P 500® Index posted its worst week ever. Investor sentiment soured given the combined uncertainties of Election Day, rising coronavirus cases and dashed hopes for a pre-election fiscal relief package. But as election results poured in, investors quickly understood Washington would likely remain divided.

Regardless the outcome of the two Georgia Senate run-off elections in January, Congress is likely to be split between the Republicans in majority in the Senate and the House of Representatives led by Democrats — but with a smaller margin than before the election. We believe this likely quells investors' pre-election concerns regarding large fiscal changes in tax and spending policies.

 

Positive year-end drivers for stock prices

Historically, stock prices and investor confidence levels tend to rise through year-end — and perform well during periods of divided government. It appears investors have been quick to follow the trend this year. For example:

  • The S&P 500 posted its best election week in almost 90 years on the prospect of a divided government.
  • Investor confidence finally rose above its historical average for the first time in 34 weeks. This ended the second-longest streak on record of below-average optimism toward stocks, per Bespoke Investment Group.
  • We believe optimism around the Pfizer/BioNTech coronavirus vaccine could accelerate stock tailwinds through year end.

 

In our view, Biden is likely to continue to pressure China on trade, manufacturing, technology and intellectual property rights. However, we expect he will be less likely to use tariffs. This could benefit global trade over time. Similarly, we expect pressures on U.S. trading partners to decline next year, helping benefit the overall business climate for multi-national companies.

Fiscal priorities — such as raising taxes on corporations and individuals at specific income levels — could face significant hurdles. We believe the Senate would likely block meaningful taxation policy changes. This is a positive for stock investors, in our view.

Although the Energy, Financials and Information Technology sectors could potentially face a more challenging regulatory environment, the chances of a meaningful change in the status quo is likely limited. Importantly, we believe global equities could see tailwinds next year from additional monetary and fiscal support.

 

Looking ahead to 2021

We believe this year's election results could produce a more positive growth path for stock prices heading into 2021. In our view, a stable and predictable White House next year could reduce policy friction that has impacted investors and companies. A divided U.S. Congress, or one with a slim party majority, is also less likely to change the rules of the road for businesses — at least for the next two years.

Less tariff friction with U.S. global trading partners should lift business and investor confidence over time, helping support profit and economic growth next year. We believe a potential fiscal relief package in the coming months would also go a long way in helping bridge the U.S. economy to the other side of the pandemic.

As we approach the final weeks of 2020, COVID-19 infection trends and the timing of a broadly available, safe and effective vaccine could play critical roles in shaping investor confidence and stock prices. While economic trends have improved since the depths of the health crisis, higher coronavirus cases over the coming weeks and months are a threat to a continued economic recovery.

Investors will need to monitor developments in the Pfizer/BioNTech vaccine for further evidence of its safety, efficacy and availability. But stocks are already discounting the positives for growth next year, in light of increasing odds the world could have a COVID-19 vaccine in several months.

 

Investor considerations

Investors should feel confident the economy continues to improve slowly. We believe the outlook for stocks heading into next year remains positive. But our outlook is contingent on global control of the virus's spread and broad availability of a safe and effective vaccine within the first half of 2021. Recent vaccine developments now make that a real possibility, in our view.

We suggest investors continue to focus on high-quality investments and a mix of stocks that can benefit from a cyclical recovery in 2021 and continue to thrive in a low-growth environment. Consider incorporating a mix of high-quality asset types into portfolios (e.g., stocks, bonds and alternative investments). For stocks specifically, this includes exposure to strong, visibly profitable and stable businesses across Industrials, Materials, Consumer Discretionary, Information Technology and Health Care sectors.         

 

 

 

Data source for indices and sector graphs: Morningstar Direct, as of November 6, 2020.

Past performance is not a guarantee of future results.

 

1 Unless otherwise noted, all data is sourced from FactSet as of 10/31/20. FactSet is an independent investment research management company that compiles and provides financial data and analytics to firms and investment professionals.