A House Divided

by | November 4, 2020

A house divided cannot stand. That was true in Lincoln’s time. The adage will now be put to the test again.

As of Wednesday morning, November 4, it remains impossible to call the US presidential election. Election uncertainty may last for several more days or even weeks. It will take days to count all the ballots and much longer to complete recounts and to resolve any contested votes in the courts.

But even if the next president remains unknown at this time, several other outcomes are abundantly clear. Above all, the US remains a deeply divided country. Biden will handily win the popular vote with easily the largest margin in US history for a losing candidate, should he fail to secure an electoral college majority. Yet Republicans will hold their advantage in the Senate and have narrowed the Democratic majority in the House of Representatives.

America may not be neatly divided into red and blue states, but it is sharply divided between red and blue voters.

What, as this juncture, can we say about the implications for financial markets? Beyond the truism that markets dislike uncertainty, other ‘tales of the tape’ are emerging. Bonds rallied, tech stocks soared, and more cyclical sectors, countries and currencies plunged as it became apparent that a ‘blue wave’ was not in the offing.

Why?

The absence of a clear mandate and the certainty of divided government dims hopes for sufficient fiscal stimulus and effective pandemic control. Accordingly, as the results came in last night growth expectations took a knock. Investors returned to the pandemic winners of big tech, comforted that corporate income tax rates are unlikely to go up and, perhaps, by the belief that anti-trust won’t make much headway in the next few years.

In short, Americans, surrounded by a swelling pandemic that the body politic cannot control, will continue to download movies and shows from Netflix and buy online from Amazon. Even as the economy suffers, big tech wins.

The minute-by-minute gyrations of markets betray other useful tidbits. As margins have shifted in Biden’s favor in Wisconsin and Michigan early Wednesday, bond yields have edged up, the Mexican peso has rallied, and the broader equity market has recovered. A Biden administration, even one facing a hostile Republican Senate majority, is seen as better for growth.

That makes sense. Science will guide executive leadership on the pandemic. Biden is more likely to successfully build coalitions on Capitol Hill to secure what economic relief can be achieved. Trade tensions will abate.

How should investors position themselves?

There is no sense in trading markets, given the uncertainties present. The only outcomes of this election, a narrow Trump victory or a narrow and contested Biden victory are unlikely to inspire confidence soon. Defensive strategies in stocks and currencies remain better places than cyclicals, for now. But if Biden becomes president, look for a gradual rotation to sectors, styles, currencies and regions that benefit from a better economy and a more effective response to the pandemic.

For now, we are all in a state of suspended animation.

About the Authors

Larry Hatheway

Larry Hatheway has over 25 years experience as an economist and multi-asset investment professional. He is co-founder, with Alexander Friedman, of Jackson Hole Economics, LLC, which offers commentary and analysis on the global economy, policy & politics, and their broad implications for capital markets. Prior to co-founding Jackson Hole Economics, LLC Larry worked at GAM Investments from 2015-2019 as Group Chief Economist and Global Head of Investment Solutions, where he was responsible for a team of 50 investment professionals managing over $10bn in assets. While at GAM, Larry authored numerous articles on the world economy, policy-making and multi-asset investment strategy. Larry was also the lead investment manager for various mandates, funds and an actively managed multi-asset index. Larry also served on the GAM Group Management Board, was Chairman of the GAM London Limited Board and served as member of the GAM Investment Management Limited Board. Larry was also Chairman of the GAM Diversity & Inclusion Committee. During his tenure at GAM, Larry was based in London, UK and Zurich, Switzerland. From 1992 until 2015 Larry worked at UBS Investment Bank as UBS Chief Economist (2005-2015), Head of Global Asset Allocation (2001-2012), Global Head of Fixed Income and Currency Strategy (1998-2001), Chief Economist, Asia (1995-1998) and Senior International Economist (1992-1995). During his tenure at UBS, Larry was also a standing member of the UBS Wealth Management Investment Committee. While at UBS, Larry worked in Zurich, Switzerland, London, UK (various occasions), Singapore and Stamford, CT. At both GAM Investments and UBS Investment Bank Larry was widely recognised for his appearances on Bloomberg TV, CNBC, the BBC, CNN and other media outlets. He frequently published articles and opinion pieces for Bloomberg, CNBC, Project Syndicate, and The Financial Times, among others. Before joining UBS in 1992, Larry held roles at the Federal Reserve (Board of Governors), Citibank and Manufacturers Hanover Trust. Larry Hatheway holds a PhD in Economics from the University of Texas, an MA in International Studies from the Johns Hopkins University, and a BA in History and German from Whitman College. Larry is married with four grown children and a loving Cairn Terrier, and resides in Wilson, WY.

Alex Friedman

Alex Friedman is the co-founder of Jackson Hole Economics, LLC, a private research organization which provides commentary and analysis on economics, politics, the environment and finance, and develops actionable ideas for how sustainable growth can be achieved. Friedman is a senior business leader with two decades of experience growing and transforming businesses in the financial and non-profit industry. He was the CEO of GAM Investments in London and chairman of the firm’s executive board. Previously, he was the Global Chief Investment Officer of UBS Wealth Management in Zurich, chairman of the UBS global investment committee, and a member of the executive board of the private bank. Before moving to UBS, Alex Friedman served as the Chief Financial Officer of the Bill & Melinda Gates Foundation. He was a member of the foundation’s management committee, oversaw strategic planning, and managed a range of the day-to-day operating functions of the world’s largest philanthropic organization. Friedman also created the foundation’s program-related investments group, the largest impact investing philanthropic fund in the world. He started his career in corporate finance at Lazard. Friedman served as a White House Fellow in the Clinton administration and as an assistant to the Secretary of Defense. He is a member of the Council on Foreign Relations and the Chairman of the Advisory Board of Project Syndicate, the non-profit opinion page that provides world-class commentary to over 500 newspapers globally. In addition, he is a board member of the American Alpine Club and the Jackson Hole Community Housing Trust, and has served on the boards of the Gates-Cambridge Trust, the Seattle Art Museum, and a number of other non-profits. Friedman is a regular contributor to several newspapers and thought leadership groups and has published numerous opinion editorials on topics including economics, finance, philanthropy, and politics in Project Syndicate, Bloomberg, The Wall Street Journal, The Financial Times, The Guardian, CNBC, The South China Morning Post, The Chronicle of Philanthropy, and other news outlets. He is also the author of Babu’s Bindi, and The Big Thing, both children’s book. An avid mountaineer and rock climber for 30 years, Friedman has climbed some of the world’s highest mountains and led the first major climb to raise money for charity through an ascent of Mt. McKinley. He holds a JD from Columbia Law School, where he was a Harlan Fiske Stone Scholar, an MBA from Columbia Business School, and a BA from Princeton University.

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