On the Radar

City National Rochdale, | Nov. 11, 2020

FAQs on the Markets and Economy

How will the election results impact markets?

CNR has been largely agnostic from a financial perspective on the election, seeing positive opportunities for investors regardless of the outcome (see our Post Election Special Bulletin).

History has taught us that markets have done well under all combinations of political power, and we suspect that will continue. Although elections bring uncertainty, as that uncertainty fades, stocks reconnect to fundamentals that are influenced — but not determined — by governmental policies.

Given the likelihood of a Biden presidency and divided control of Congress, we do not expect significant shifts in policy that would have a material impact on the current trajectory of the economy or equity markets.

Indeed, early indications are that investors have welcomed prospects of a divided government all but eliminating the likelihood of substantial tax increases and sweeping regulatory reform, but not removing the potential for an agreement among lawmakers on another round of COVID-19 relief.

In sectors and industries where policy changes could have positive or negative impacts, rigorous company analysis and active management will be key.

However, in the regard to the broader outlook, we expect fiscal and monetary policy to remain exceptionally supportive regardless of the election results, and the economic recovery from the pandemic, along with improving prospects for an effective vaccine, to be the main driving force for markets over the coming year.

The dollar began weakening in the late-spring as the probability of a phase four fiscal stimulus plan began to fade (see chart). Then, during the early-summer, as the number of COVID-19 cases began to rise, it fell further.

Since late-summer, the USD has traded in a narrow channel, reflecting global pressures of reduced stimulus and concerns of another wave of COVID-19 as we enter the winter months.

All else being even, a weaker dollar makes exports more attractive (helping domestic exporters) and imports more expensive, which will help increase inflationary pressures (the Fed would like to see). That said, the movement in the value of the dollar over the past year is not enough to have a measurable impact on either of those events.

The Fed is holding pat. They unanimously decided to keep the federal funds rate unchanged at 0.125% (see chart) and will keep the pace of asset purchases unchanged (treasuries at $80 per month, mortgages at $40 per month). All of this was consistent with market expectations.

The Fed acknowledged the recovery is underway, but the path of the economy hinges on the course of the coronavirus. The recovery depends on the public getting back to their way of life and spending habits they had before the pandemic set in.

They also believe more fiscal aid from the federal government is needed. This is especially true for industries that have been significantly impacted by the virus, like hospitality, airlines, and state and local government workers. The greater the fiscal support, the stronger the recovery.

The October labor report was unquestionably strong. The unemployment rate plunged from 7.9% to 6.9%, which places it 0.7 ppts below the Fed’s median year-end forecast of 7.6%.

Nonfarm payrolls increased 638,000. It is a strong number in normal times but represents a declining trend of four months, since peaking in June at 4.8 million. That said, the details were more encouraging. The gain represents the private sector increasing 906,000 (larger than September’s gain of 892,000) and government jobs declining 268,000. The decline in government jobs can be primarily attributed to Census-related layoffs of 147,000 (there are still 99,000 remaining Census workers).

Overall, the economy has regained roughly 12 million of the 22 million jobs lost due to the pandemic, representing a 54% recovery (see chart).

The troubling part is that the number of people on permanent layoffs (3.7 million) now exceeds those on temporary layoff (3.2 million). This is normally a sign of slowing job growth in the future.

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Important Disclosures

The information presented does not involve the rendering of personalized investment, financial, legal, or tax advice. This presentation is not an offer to buy or sell, or a solicitation of any offer to buy or sell, any of the securities mentioned herein.

Certain statements contained herein may constitute projections, forecasts, and other forward-looking statements, which do not reflect actual results and are based primarily upon a hypothetical set of assumptions applied to certain historical financial information. Certain information has been provided by third-party sources, and although believed to be reliable, it has not been independently verified, and its accuracy or completeness cannot be guaranteed.

Any opinions, projections, forecasts, and forward-looking statements presented herein are valid as of the date of this document and are subject to change.

There are inherent risks with equity investing. These include, but are not limited to, stock market, manager, or investment style risks. Stock markets tend to move in cycles, with periods of rising prices and periods of falling prices.

Investing in international markets carries risks such as currency fluctuation, regulatory risks, and economic and political instability.

Emerging markets involve heightened risks related to the same factors as well as increased volatility, lower trading volume, and less liquidity. Emerging markets can have greater custodial and operational risks, and less developed legal and accounting systems, than developed markets.

There are inherent risks with fixed income investing. These may include, but are not limited to, interest rate, call, credit, market, inflation, government policy, liquidity, or junk bond risks. When interest rates rise, bond prices fall. This risk is heightened with investments in longer-duration fixed income securities and during periods when prevailing interest rates are low or negative.

Investments in below-investment-grade debt securities, which are usually called “high-yield” or “junk” bonds, are typically in weaker financial health, and such securities can be harder to value and sell and their prices can be more volatile than more highly rated securities. While these securities generally have higher rates of interest, they also involve greater risk of default than do securities of a higher-quality rating.

The yields and market values of municipal securities may be more affected by changes in tax rates and policies than similar income-bearing taxable securities. Certain investors’ incomes may be subject to the federal Alternative Minimum Tax (AMT), and taxable gains are also possible.

Investments in the municipal securities of a particular state or territory may be subject to the risk that changes in the economic conditions of that state or territory will negatively impact performance. These events may include severe financial difficulties and continued budget deficits, economic or political policy changes, tax base erosion, state constitutional limits on tax increases, and changes in the credit ratings.

Investments in emerging markets bonds may be substantially more volatile, and substantially less liquid, than the bonds of governments, government agencies, and government-owned corporations located in more developed foreign markets.

Returns include the reinvestment of interest and dividends.

Investing involves risk, including the loss of principal.

As with any investment strategy, there is no guarantee that investment objectives will be met, and investors may lose money.

Past performance is no guarantee of future performance.

CNR is free from any political affiliation and does not support any political party or group over another.

Index Definitions

S&P 500 Index (S&P500) is a stock market index that tracks the 500 most widely held stocks on the New York Stock Exchange or NASDAQ. It seeks to represent the entire stock market by reflecting the risk and return of all large-cap companies.

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