Fears of unrest rise on the eve of Election Day

Well, last week was in fact a Pepto Bismol kind of week, just as I had expected. No fiscal stimulus in the US, COVID-19 cases on the rise in Europe and the US, and growing concerns about the US presidential election. It’s no wonder that the VIX volatility index has risen dramatically in the last few weeks, from 25 on Oct. 9 to 38 on Oct. 30.¹ As I’ve said before, today’s election concerns aren’t your usual run-of-the-mill worries like we saw in past election cycles. Past questions focused on issues such as “What happens to stocks if corporate taxes go up?” This time around, it is “What happens if there is a contested election?” and “What happens if there is civil unrest?”

A history of contested elections

Contested presidential elections have happened before. Not just in 2000, but in 1876. That was the contest between Rutherford B. Hayes, the Republican nominee, and Samuel Tilden, the Democratic nominee.² Tilden won the popular vote and led with more electoral votes (185-184), but there was a dispute over four states’ electoral votes. In three of those states (Florida, Louisiana and South Carolina), Tilden appeared to win the popular vote, but there were reports of widespread electoral fraud and voter intimidation against Hayes supporters. One fraudulent tactic was to confuse illiterate voters into supporting Tilden by using revered Republican President Abraham Lincoln’s picture next to Tilden’s name. As such, those three states disqualified Democratic votes — but this was not without controversy. For example, the state of Florida produced two slates of electors — one slate for Tilden, one slate for Hayes. In Oregon, Hayes won the popular vote and therefore the state’s electoral votes, but one of his electors in that state was disputed, as the Democratic governor removed him for violating Constitutional requirements and replaced him with a Democratic elector. In the midst of this dispute, a protester fired a rifle into the home of the Republican candidate Hayes.

After competing slates of electors for these states were sent to Congress, Congress attempted to resolve this election dispute between Tilden and Hayes by creating an “electoral commission” comprised of five Supreme Court justices, five representatives and five senators. The political climate became very tense, leading General William Sherman to order troops to Washington, D.C., to maintain order. Militant Democrats warned of blood in the streets if Tilden did not become president, and headlines screamed, “Tilden or War!”

The electoral commission decided in February 1877 that Rutherford B. Hayes would be the next president. However, Democrats were incensed by the decision and attempted a filibuster to prevent Congress from accepting the commission’s decision and prevent Hayes’ inauguration. The standoff finally led to the Compromise of 1877, an attempt to placate Tilden supporters so that they would support Hayes’ presidency. In return for accepting the electoral commission’s decision to name him as the next president, Hayes agreed to the withdrawal of federal troops from the South, which in effect ended Reconstruction. However, the situation was so politically charged that there was an attempted assassination of Hayes during the inauguration festivities. Despite that troubling start, Hayes served one term as president and, despite continued grumbling about his legitimacy from Tilden supporters, presided over a relatively peaceful period in the nation’s history.

That particular scenario won’t happen again because soon after the dispute, Congress passed the Electoral Count Act of 1887. While flawed, it provides more specific guidance on how to manage a dispute over electoral votes. We of course experienced another contested election in 2000. It was a very civilized affair in comparison to 1876. In a little over a month after election day, the Supreme Court decided the victor, George W. Bush, and no compromise had to be offered to Democrats to placate them.

Concerns about civil unrest ahead

Now there is concern that there could be another contested election, but that it might not be as civilized and polite as 2000 — and in fact might lead to civil unrest. I believe there is some validity to these concerns. After all, last week Wal-Mart was so concerned about the potential for civil unrest that it made the decision to temporarily remove guns and ammunition from store aisles in order to prevent the theft of these weapons if stores are looted, although it reversed the decision the next day.³ And on Friday, the Biden campaign cancelled a rally in Texas because Trump supporters surrounded the Biden bus, allegedly ramming a Biden-supporting car traveling alongside the bus and holding up traffic.⁴ In addition, businesses in a number of cities are boarding up windows in preparation for civil unrest.⁵  Finally, it is expected that the federal government will re-install a “non-scalable fence” around the White House today, in preparation for the possibility of unrest (the fence had been temporarily installed this summer during Black Lives Matter protests, but had since been removed).⁶  

Well, it might be both sad and reassuring to know there is a long history of American civil unrest around elections. For example, in the 1850s, the Know-Nothing Party supported the use of violence in order to prevent immigrants from voting. This was not a fringe movement — this was a powerful political party, with members holding 22% of the seats in Congress in 1854.⁷ In Baltimore, there was a bloody clash between the Know-Nothing Party and the Democratic Party that resulted in the deaths of eight people. In 1855, there was an even bloodier episode of civil unrest in which the Know-Nothing Party was involved, resulting in the killings of 22 people, most of whom were German and Irish immigrants.⁸ 

Arguably the biggest incidence of civil unrest was the Civil War, which got its start in 1860 with the refusal of southern states in the US to accept the results of the presidential election. But it didn’t stop there. However, historically we have seen a disconnect between civil unrest and the stock market. I look to 1968 as a guide as it was a period of very serious civil unrest. As is the case today, there were deep divisions in the US around critical issues such as the Vietnam War and civil rights in the 1960s. Much of it came to a head in 1968, a year when opposition to the Vietnam War became so powerful that incumbent President Lyndon Johnson made the surprise decision to not seek another presidential term. This was a year when civil rights icon Martin Luther King was assassinated, as was Democratic presidential candidate Robert F. Kennedy. There was rioting in many cities for months, including at the Democratic National Convention. And yet the stock market was largely divorced from this civil unrest and actually finished the year in positive territory.⁹

We have to recognize that America has a long history of violence surrounding elections, which has the potential to rear its ugly head again, especially in a period of heightened tensions and a pandemic. The good news is that, despite this history, democracy in America has survived. And while many are concerned about controversy and unrest surrounding the 2020 US election, I believe that the checks and balances we have in place will lead us through. From an investment perspective, I expect things like innovation and business fundamentals to drive the stock market in the long term, despite any shorter-term volatility that may arise.

Looking ahead

So what is ahead for this week? Likely more investor indigestion, and not just from the US presidential election. We now know more definitively than ever that fiscal help is not on the way in the US in the near term. But what’s worse is that the second wave of COVID-19 has arrived, and it’s bad enough to warrant significant lockdowns in Europe.

Over the weekend, Prime Minister Boris Johnson announced a second lockdown in the UK in an attempt to control an alarming rise in COVID-19 infections. Johnson said that England will close all nonessential businesses for the next four weeks — although it will keep schools open. This means people must stay at home except for the purposes of education, medical treatment, or grocery shopping. Since then, British citizens have been put on notice that the lockdown may need to last more than a month. Keep in mind that not too long ago, the British government was incentivizing citizens to eat out with government subsidies; now it has closed all pubs and restaurants for dining, and they can only provide takeout or delivery.¹⁰ What we learned in the spring is that Europe’s present can be the US’s future in just a few weeks, and the prospect of a lockdown in the US could really rattle investors and send stocks down even further.

Heading toward Election Day on Tuesday — and the potentially tumultuous days after — I favor staying the course and maintaining a long-term asset allocation. If you’re sitting on cash that you are looking to deploy, you may find some attractive opportunities this week and possibly in the weeks ahead. And finally, stay calm — I plan to have some wine and chocolate on hand alongside my Pepto Bismol.

1 Source: Bloomberg, L.P. The CBOE Volatility Index® (VIX®) is a key measure of market expectations of near-term volatility conveyed by S&P 500 stock index option prices. VIX is the ticker symbol for the Chicago Board Options Exchange (CBOE) Volatility Index, which shows the market’s expectation of 30-day volatility.

2 Sources for Hayes/Tilden history include: BBC News, “Flashback to 1876: History repeats itself,” Dec. 12, 2000; Michael Benedict, “Southern Democrats in the Crisis of 1876-1877: A Reconsideration of Reunion and Reaction,” Journal of Southern History, 1980; Columbian College of Arts & Sciences, The George Washington University, History News Network, “The List of Presidential Assassination Attempts Is Shockingly Longer than Anyone Thought.” July 19, 2015; Harpweek, “Finding precedent: Hayes vs. Tilden, the Electoral College controversy of 1876-1877”

3 Source: CNBC.com, “Walmart pulls guns, ammo off sales floors because of ‘civil unrest’ in some areas, but will still sell them,” Oct. 29, 2020

4 Source: click2houston.com, “Video: Vehicles flying Trump flags surround Biden campaign bus on Texas freeway,” Nov. 1, 2020

5 Source: Fox Business, “Businesses across nation board up windows ahead of potential Election Day unrest,” Nov. 1, 2020

6 Source: Daily Mail, “Fortress White House: Crews will begin building ‘non-scalable fence’ around the complex tomorrow as Secret Service prepares for potential unrest,” Nov. 2, 2020

7 Source: theconversation.com, “Violence has long been a feature of American elections,” Nov. 7, 2016

8 Source: Scientific American, “Violence Has Long Been a Feature of American Elections,” Nov. 7, 2016

9 Source: Bloomberg, L.P.

10 Source: CNBC.com, “Prime Minister Boris Johnson imposes stay-at-home order in England as coronavirus cases surge,” Oct. 31, 2020

Important information

Blog header image: JEREMY PAWLOWSKI / Stocksy

All investing involves risk, including the risk of loss.

The opinions referenced above are those of the author as of Nov. 2, 2020. These comments should not be construed as recommendations, but as an illustration of broader themes. Forward-looking statements are not guarantees of future results. They involve risks, uncertainties and assumptions; there can be no assurance that actual results will not differ materially from expectations.

Source: https://www.blog.invesco.us.com/fears-of-unrest-rise-on-the-eve-of-election-day/?utm_source=rss&utm_medium=rss&utm_campaign=fears-of-unrest-rise-on-the-eve-of-election-day

Election Night 2020: Champagne and cheers, or anxiety and jeers?

In what many voters feel like has been a never-ending presidential campaign cycle, Nov. 3 is finally close enough to touch. But will Election Day 2020 provide closure for a restless electorate?

As President Donald Trump and former Vice President Joe Biden barnstorm a handful of battleground states, the intricacies and mechanics of how a candidate becomes president are coming into light, and all eyes are on the Electoral College. Consisting of 538 electors representing all 50 states and Washington D.C., and roughly allocated by population, the Electoral College, not the popular vote, ultimately decides US presidential elections. To win, a candidate must secure an absolute majority – 270 or more electoral votes. Since most states – with the exceptions of Nebraska and Maine – assign electoral votes on a winner-take-all model based on statewide vote totals, a small percentage of voters in key states can play a deciding role in the overall election outcome. Former Secretary of State Hillary Clinton learned this painful lesson when she captured the popular vote but fell short of the electoral vote four years ago.

With so few states actually in play (in our view, this include Florida, Michigan, Pennsylvania, Georgia, Ohio, Wisconsin, Arizona, Nevada, Minnesota, North Carolina, and New Hampshire), political experts have been taking a deeper look at chaos theories and “what if” scenarios. What if results are contested? Could there be recounts, lawsuits or both? Will state legislatures have to get involved?

Source: Invesco analysis

Political talking heads have focused on Bush v. Gore in 2000 as the precedent for presidential election chaos. That dispute, untimely decided by the Supreme Court, halted an ongoing recount and determined that President George W. Bush had won Florida by 537 votes. That victory meant that Bush won all 25 of Florida’s electors, giving him a total of 271 votes in the Electoral College and, with that narrow majority, the presidency.

Some experts have forecasted that several states in 2020 could see similar recount and courtroom drama leading all the way to the Supreme Court in deciding whether Trump wins a second term or Biden claims victory. Their predictions are based on the craziness of 2020: the pandemic, a record number of mail-in ballots, the polarization of America and President Trump’s characterization of the voting process.

However, famed Republican election lawyer Benjamin Ginsberg recently put the odds of the 2020 presidential election ending up in a legal battle that sprawls into January at just 1%, citing more signs pointing to a smooth transition than a repeat of 2000.¹ Keep in mind that only three of the 57 previous presidential elections have been contested. ¹

But is history relevant in modern politics? Here are several variables to watch for to determine if this election will be decided within hours, weeks or months of the polls closing.

Vote counting

Democrats have embraced vote-by-mail while President Trump has lambasted it as fraudulent, despite casting his own ballot by mail in past elections. History will take a very close look at the encouragement – and discouragement – of mail-in and absentee voting on the results of the election both in terms of the presidential outcome as well as the impact on down-ballot candidates.

Election Day and subsequent weeks could see voting result fluctuations as in-person votes are tabulated and mail-in and absentee ballots are counted. As of Oct. 21, the US Elections Project counted 84.7 million absentee ballots that had been requested and 44 million people who had already voted. We expect to see confusion on election night as both political parties and news outlets grapple with reporting in-person votes versus absentee or mail-in as different states have different rules on when votes can be counted. Also, there are questions as to when mail-in or absentee votes are valid.

Here are three different categories of how and when states can count early votes, and they will be important to understand the differences as the results come in:

1. Upon receipt. 22 state election authorities and the District of Columbia start counting when the ballot is received. Among this group, Arizona, Georgia, Minnesota and Nevada are considered the most pivotal for the presidential election and could foreshadow a good night for President Trump or former Vice President Biden. If Biden were to flip the red state of Georgia to blue and secure 16 electoral votes, it could prove be to be a tough road for Trump. Similarly, in 2016, Trump narrowly lost Minnesota – a state that has not voted for a Republican president since 1972. If the results look favorable for Trump there, it could not only put 16 critical electoral votes in his tally but foreshadow that the famous “Blue Wall” (Michigan, Wisconsin, and Minnesota) has crumbled. Arizona’s ability to count as the votes are received prior to Nov. 3 could permit some early forecasting on whether Trump recaptures the Grand Canyon State’s 11 electoral votes, or if Biden is well on his way to becoming the 46th president.
2. Before election day. 25 state election authorities can tabulate votes at a defined date by state law. Among this group, Florida, Iowa, Michigan, New Hampshire, North Carolina and Ohio are considered the most critical to election outcomes. But these states differ as to when counting is permitted. On one end there is Florida, which started its tabulation on Sept. 24, and on the other end is Michigan, which starts counting 10 hours before Election Day. The early tabulation will allow states to report out Nov. 3 numbers that could either spell doom and gloom or early moments of celebration for either party. In our view, President Trump’s path to victory will be severely truncated if he cannot match his 2016 victories in Florida, Ohio, Michigan and North Carolina. Similarly, any victory by Biden in these same states would be a sign of optimism for Democrats. The ability for these states to count early should remove weeks of suspense as they will have a head start on tabulating votes while also counting in-person voting, which is expected to lean Republican. Another important element to watch in Florida is that the state does not allow ballots to be counted if they are received after Election Day, which should reduce election result delays.

• On election day. Four state election authorities can tabulate votes on the date of the election, with Wisconsin and Pennsylvania by far the most important to determining election outcomes. President Trump shocked the political establishment in 2016 when he won both states, and neither party is leaving anything on the table in 2020. Both Republicans and Democrats will be closely watching election night to see results in these battleground states. Wisconsin officials have said they expect to have their results completed the day after the election. The state has also permitted county clerks to verify signatures on the outside of the ballots early, which should reduce day-of vote counting (and suspense) and reduce the number of questionable ballots.

What does this all mean?

The ability for critical bellwether states to either tabulate ballots as they come in or on a certain date before Nov. 3 does provide some certainty that election results will come sooner rather than later. It is estimated that 40% to 50% of the projected 150 million votes could be cast by mail. Experts largely expect early voting to favor Democrats and Election Day in-person voting to favor Republicans. Depending on when states begin counting mail-in votes, and therefore which votes – mail-in or in person – are reported first, there could be several “blue or red shifts.” This could create the impression that one state is headed blue or red based on that state’s ballot counting requirements. The “blue and red” shifts may frustrate the candidates and create the appearance of “fraud” or gamesmanship, but they are simply part of the process that will allow the results of the election to be made public faster.

Electoral College

With only a handful of truly competitive states, the path to either candidate securing the 270 electoral votes needed for victory hinges on election returns in Florida, Michigan, Pennsylvania, Georgia, Ohio, Wisconsin, Arizona, Nevada, and Minnesota. Contested or uncertain results in any of these states, as occurred in Florida in 2000, could prevent either candidate from reaching the 270-vote threshold. President Trump and some experts have raised concerns that delays in finalizing election results could run into the Dec. 8 safe harbor deadline. This deadline, set by federal law, is the last day when states can appoint electors without interference from Congress.

Electors are set to cast their votes on Dec. 14. If a state’s results remain contested and without a clear winner past Dec. 8, there is no clear remedy. One option would be for the state’s legislature to name its own slate of electors regardless of the results of the statewide vote. In states where one party controls the legislature and a different party holds the governor’s office, this could result in competing slates of electors being sent to Congress. In either case, a state government overriding the popular vote could lead to claims of a “stolen election” and push the losing party to not accept the results. Despite the possibility of these worse case scenarios, it is important to note that no state legislature has ever appointed a slate of electors supporting a candidate who lost that state’s popular vote, and in our view, this remains unlikely in 2020.

State election rules and law

If election results in one or several states are in question this November, the vast majority of states have basic election safeguards already in place to create an orderly process to determine the legal electoral outcome.

As of October 2020, 20 states have a statutory provision allowing for an automatic recount of votes if the margin between the top two candidates is within certain parameters. Forty-three states have a statutory provision allowing for a requested recount of votes. In our view, it is highly unlikely that statutory requirements for a mandatory or requested recount will be triggered since it is improbable that those states’ results will be so narrow and are relevant to the Electoral College outcome that the country will see widespread vote recanvassing. The biggest hurdle for a contested election would be a few battleground states that have protracted election recounts that could see their results questioned.

Conclusion

The bottom line is that states have been preparing for a highly competitive presidential race and will be certain to ensure the results are accurate and timely. The rules of the road are clear in disputing election (allegations of fraud) results and requesting recounts, and all eyes will be on those states if their results will determine the winner. While it could be a bumpy road over the next several weeks, it’s unlikely Americans will have to go too long before they know who will serve as president for the next four years.

1 Source: Bloomberg, “Election Night Has Paths to a Fast Result—or a Lengthy Slog,” Oct. 14, 2020

Important information

Blog header image: Hill Street Studios / Getty

The opinions referenced above are those of the authors as of Oct. 30, 2020. These comments should not be construed as recommendations, but as an illustration of broader themes. Forward-looking statements are not guarantees of future results. They involve risks, uncertainties and assumptions; there can be no assurance that actual results will not differ materially from expectations.

Source: https://www.blog.invesco.us.com/election-night-2020-champagne-and-cheers-or-anxiety-and-jeers/?utm_source=rss&utm_medium=rss&utm_campaign=election-night-2020-champagne-and-cheers-or-anxiety-and-jeers

Smart cars are getting much smarter

Three years ago, we wrote about “your car in 5 years’ time,” but it is already time for an update. Voice commands have been fully integrated into new cars, and they’re capable of doing much than the commercials demonstrating “Alexa, start my car,” promised. Making phone calls hands-free in the car seems normal now, and so progress goes, the fantastic and whimsical becoming commonplace.

The auto companies are serious about innovation. Research and development (R&D) dollars spent in the auto industry were close to $130 billion in 2018, only trailing R&D dollars spent in the Healthcare and Information and Communications Technology sectors.¹

We didn’t predict the auto slump in the fourth quarter of 2019, but we believe there will be a quick rebound, helped by the pandemic. People will be increasingly relying on their cars for transport as concerns about exposure to the virus has caused the volume of public transport and air travel to fall off a cliff. We expect motor vehicle miles travelled will benefit from these declines.

The pandemic has started a deurbanization trend, as fewer employers may return to requiring workers to be onsite five days a week. As more people have the opportunity to work from anywhere, more are likely to leave cities and commuter towns. The move to areas with fewer public transportation options will encourage more travel by vehicle. So too will the fact that people can combine work and travel more easily because they can now work remotely from any location, even as passengers in car while travelling to an area they’re visiting for a getaway.

Millennials are getting married and having kids later than previous generations did.³ Having more young families living further away from major cities will increase the pace of deurbanization and create more multi-car families.

From “Alexa, start my car,” it is an easy next step to “set the temperature to 70 degrees,” and or having the car automatically program the GPS for the address of an event in your calendar. While all this technology-based convenience does require more interconnectivity, with greater demands for communication between the car and the driver’s smartphone, this level of connection can be facilitated through 5G cellular access. 5G can handle many times more bandwidth than 4G, and that will enable all sorts of tiny devices to connect to the internet and talk to each other. Examples of this may include communicating with personal wearable devices that can detect a driver’s body temperature and set the car temperature to best align with that or sense when a driver is getting drowsy and lower car temperature to keep them more alert.

Qualcomm is the leader in the 5G with the intellectual property rights to much of the technology that drives it. All the major producers of 5G communication equipment have agreed to work with Qualcomm or pay it a royalty. 5G will allow more users to have high-speed Internet access at the same time, so cars can talk to other cars and to the cloud, while passengers stream their entertainment or work video calls, without any delays in data transmission times.

Making some of the examples cited here – like adjusting the car’s internal temperature in response to the driver’s or delivering directions to an event scheduled in someone’s calendar — requires not just communication between devices, but also quick and local machine intelligence, facilitated by processing semiconductor chips in the car. The technology required is already in cars. For example, with lane departure warning systems, a sensor detects when a car is drifting and sends the information to a central processing unit, which then sends information to the steering and tires to bring the car back into its lane. Adding more functionality adds complexity and increases need to keep the systems separate and secure, and that is something Blackberry is most expert at doing.  

Corning, which makes touchscreens, is also developing tough but lightweight glass that will be used in car windows. Reducing a car’s weight helps save on battery power and also lowers the car’s center of gravity, thereby increasing a car’s ease of handling.

It is easy to understand why people compare new electrified cars to smartphones. Still, there is a huge difference in the power demands of smart phones vs. cars, with the primary purpose of the latter being to move people and cargo — a power-hungry task. While smartphones can be powered by 12-volt batteries, cars will need much higher voltages to power all these new features. While smartphones can be powered by simple 12-volt batteries, the voltage needed to quickly charge powerful car batteries is much higher, and the silicon semiconductor chips that are used in smartphones can’t handle this level of voltage or the associated high temperatures. The auto industry is instead looking to use Silicon Carbide (SiC).

SiC is a crystal that is transparent and glittering. Picture a diamond without the branding people behind it. It is difficult to make because high temperatures and high pressure are required. The American manufacturer Cree has been making SiC for 30 years for more niche applications, and we believe it is poised to benefit from the growth in the usage of SiC. 

As part of our investment process, we get to travel the world to find companies that will benefit from changes such as the ones transforming the auto industry. An example is PVA TePla in Germany, which makes the furnaces that Cree uses to grow SiC under high temperature and high pressure. Another example DISCO Corporation in Japan, which makes cutting-edge tools to slice the SiC. Silicon can be cut using grinding saws, but SiC is much harder, and much more expensive, and saws cause too much waste. DISCO has developed laser cutting tools for SiC that allow companies to get significantly more out of each SiC ingot.

We may not have cars traveling through the air, as many futurists imagined, but cars continue to deliver breakthrough technologies that make driving safer, convenient, and more fun. We continue to search for companies that we think can enable investors to benefit from these transformative innovations.

1  Source: “European Autos: The Reincarnation of the Car,” Sanford C. Bernstein & Co., LLC, 9/8/20.

2  Source: “European Autos: The Reincarnation of the Car,” Sanford C. Bernstein & Co., LLC, 9/8/20.

3  Source: The US Census Bureau, Feb. 2020

As of 9/30/20, Qualcomm represented 1.57% of Invesco Global Opportunities Fund’s holdings; Blackberry, 0.24%; Corning, 0.43%; Cree, 0.85%; PVA TePla, 0.38%; and DISCO Corporation, 0.65%. Holdings are subject to change and are not buy/sell recommendations.

Important Information

Image Credit: Monty Rakusen / Getty

Many products and services offered in technology-related industries are subject to rapid obsolescence, which may lower the value of the issuers.

Before investing, investors should carefully read the prospectus and/or summary prospectus and carefully consider the investment objectives, risks, charges and expenses. For this and more complete information about the fund(s), investors should ask their investment professional for a prospectus/summary prospectus or visit invesco.com/fundprospectus.

The opinions referenced above are those of the authors as of Oct. 31, 2020. These comments should not be construed as recommendations, but as an illustration of broader themes. Forward-looking statements are not guarantees of future results. They involve risks, uncertainties and assumptions; there can be no assurance that actual results will not differ materially from expectations.

This does not constitute a recommendation of any investment strategy or product for a particular investor. Investors should consult a financial advisor/financial consultant before making any investment decisions. Invesco does not provide tax advice. The tax information contained herein is general and is not exhaustive by nature. Federal and state tax laws are complex and constantly changing. Investors should always consult their own legal or tax professional for information concerning their individual situation. The opinions expressed are those of the authors, are based on current market conditions and are subject to change without notice. These opinions may differ from those of other Invesco investment professionals.

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Election 2020: Five truths to remember about politics and investing

Vice President Dan Quayle once declared, “This election is about who’s going to be the next president of the United States!”¹  Quayle’s stating of the obvious was mocked by the nation’s punditry. From an investors’ perspective, however, the gaffe might be more brilliant than any of us originally realized. 

History teaches us that elections tend to not have the dramatic impact on the financial markets that investors fear or hope.  After all, the US equity market, as represented by the S&P 500 Index, returned 10.2% per year from 1957 through the end of the third quarter 2020.²  Per the Rule of 72, that’s a doubling of the broad US equity market every 7.05 years across seven Republican administrations and five Democratic administrations.³ 

With the nation mercifully approaching the Nov. 3 election, I believe there are five truths about politics and investing that are important to remember.  As Jerry Seinfeld titled his 1998 comedy special, “I’m telling you for the last time” (or at least until 2024).

1. Hating the government is not an investment strategy

The last presidential election was decided by 80,000 people in three states.⁴  In a country of about 328 million people (130 million voters), that is a remarkably small number.⁵  Prior to that, in 2012, Barack Obama won re-election with only 51.06% of the vote.⁶  Recent poll numbers are again telling us that a large percentage of the population may not be happy with the outcome.⁷

Fortunately, it is not a prerequisite that an overwhelming majority of the country approve of the president for US equities to go up.  In fact, history has shown it’s just the opposite:  Markets, historically, have performed best when the president’s approval rating was between 35 and 50, proving, once and for all, that hating the government is not an investment strategy.⁸ 

2. Divided government is not a prerequisite for sound market performance

It’s no secret that the US equity market has historically performed best with a divided government.  Although I’d argue that well-known “fact” may not be as statistically significant as investors suspect.  For example, since 1933, the best outcome for the S&P 500 Index (+13.6%) based on partisan control was with Democrats in the White House and Senate, and Republicans controlling the House of Representatives.⁹  What is often not mentioned is that combination only existed in four of the past 88 years (4.5% of the time), from 2011-2015.  With apologies to President Barack Obama, Majority Leader Harry Reid, and Speaker John Boehner, I suspect the outsized outcome was largely reflective of the times (economic recovery, US Federal Reserve’s zero interest policy) rather than of the talents of the nation’s leaders.

For what it’s worth, the US equity market has also occasionally produced outsized returns even under single-party government rule.  A unified government did not appear to be an issue for the S&P 500 Index in Obama’s first year (+44% from Jan. 20, 2009, to Jan. 20, 2010) nor in Donald Trump’s first year (+26% from Jan. 20, 2017, to Jan. 20, 2018).¹⁰

3. Specific market predictions based on election outcomes tend to be inaccurate

There is a cottage industry built on advising investors on how different asset classes, sectors, and industries may perform based upon which party controls the executive branch of government.  Does anyone ever go back and look at the predictions? 

For example, in 2008, many people believed that the McCain-Palin “drill baby, drill” ticket was good for big oil, while Obama-Biden were going to decimate the fossil fuel industry. But in Obama’s first term, advanced techniques for oil extraction drove production to a 45-year high¹¹ and the Alerian Master Limited Partnership Index climbed by 93%.¹²  And in 2016, many believed that Trump’s tax and regulatory policies would lead to a sustained rise in interest rates and unlock the value that existed in the financial sector.  Although the stock market performed well during Trump’s term, the financial sector was among the worst performing sectors.¹³ 

4. Starting points matter

How is it that such diverse presidents as Ronald Reagan, Bill Clinton, and Barack Obama each experienced outsized equity market returns over the course of their administrations?  To rephrase Clinton strategist James Carville, “It’s the starting point, stupid.” 

Reagan, Clinton, and Obama each became president at moments when:

1. The economy was in or recently coming out of recession.¹⁴
2. Stocks were trading at historically cheap levels.¹⁵
3. The Federal Reserve was easing financial conditions.¹⁶

Today’s backdrop doesn’t appear to be significantly different than the one those presidents inherited (while stocks aren’t necessarily trading at cheap levels, they are historically cheap to bonds).¹⁷ That’s true no matter who wins the election. 

5. Private sector ingenuity continues unabated

Quayle was right.  This election is about who’s going to be the next president of the United States — it’s not about which sector may outperform next year, or where the stock market may be in the next four years. I’m far more interested in the business leaders who are going to harness the powers of artificial intelligence and robotics, create the next generation of life sciences that can cure our most debilitating diseases, address the COVID crisis, continue to evolve the nation’s energy sources, and develop new technologies and new industries that aren’t even yet on our radar. Here’s an abridged list of products or services brought to the market over the past 12 years: cloud computing, tablets, wearable fitness trackers, 3D printing, social media, ride sharing, the world’s first full face transplant, the world’s first bionic eye implant, electric cars, driverless cars, virtual meeting software, gene editing, multi-use rockets, virtual home assistants, virtual payment systems, smart homes, to name a few. 

History suggests that the advancements are about to get a whole lot better, irrespective of who wins the election.  They always have.

1 This quote, reportedly uttered on the campaign trail in 1988, is widely found on many lists of famous quotes from politicians, including brainyquote.com, quotefancy.com, and many more.

2 Source: Bloomberg, Standard & Poor’s, as of 9/30/20.

3 Source: Bloomberg, Standard & Poor’s, as of 9/30/20. The Rule of 72 is a popular shortcut used to estimate the number of years required for an investment to double in value at a given annual rate of return.

4 Source: Federal Election Commission

5 Source: US Census Bureau, as of 2019

6 Source: Federal Election Commission

7 Source: RealClearPolitics, as of 10/22/20.

8 Source: Bloomberg, Gallup, Invesco, as of 9/30/20.  Results are based on grouping the Gallup Presidential Approval Ratings into four quadrants (> 65, 50-65, 35-50, and <35).

9 Source: Strategas Research Partners, as of 9/30/20.

10 Source: Bloomberg, Standard & Poor’s, as of 9/30/20.

11 Source: US Department of Energy

12 Source: Bloomberg

13 Source: Bloomberg, Standard & Poor’s, as of 9/30/20.  Results are a comparison of the S&P 500 Financial Sectors Index vs. each of the other S&P 500 Global Industry Classified Standard (GICS) 1 sector indices.

14 Source: US Bureau of Economic Analysis

15 Source: Bloomberg, as represented by the price to earnings ratio of the S&P 500 Index.

16 Source: US Federal Reserve

17 Source: Bloomberg, as of 9/30/20.  Analysis compares the earning yield of the S&P 500 Index to the 10-year US Treasury rate.

Important information

Blog header image: Bloomberg Creative / Getty

All investing involves risk, including the risk of loss.

The Alerian MLP Index is a float-adjusted, capitalization-weighted index measuring master limited partnerships, whose constituents represent approximately 85% of total float-adjusted market capitalization.

The opinions referenced above are those of the author as of Oct. 28, 2020. These comments should not be construed as recommendations, but as an illustration of broader themes. Forward-looking statements are not guarantees of future results. They involve risks, uncertainties and assumptions; there can be no assurance that actual results will not differ materially from expectations.

Source: https://www.blog.invesco.us.com/election-2020-five-truths-to-remember-about-politics-and-investing/?utm_source=rss&utm_medium=rss&utm_campaign=election-2020-five-truths-to-remember-about-politics-and-investing

Stay prepared for a volatile autumn

I am lucky enough to have developed a network of friends despite being a working mom. Some of these friends go back to childhood and high school, some are moms I have met through my children’s schools, and some are friends I have met in the workplace. They have provided a wonderful web of support throughout the chaos that can be child-rearing and everyday life. I have joked with them about particularly bad days — like a parent-teacher conference that we expected to go awry — as being “Pepto-Bismol” days, referring to the medicine used to combat upset stomach (an unfortunate symptom of many a crazy day).

Well, I feel some serious Pepto-Bismol days coming on, given the impending US presidential election, the declining possibility of another US fiscal stimulus package in 2020, and rising COVID-19 infection rates around the world.

Is a contested election in the cards?

Let’s start with the US presidential election. The final debate took place last week, and Americans are already voting in record numbers. According to Professor Michael McDonald of the University of Florida, about 59 million people have already voted in the presidential election as of Oct. 25. Of those, about 39.8 million have been mail-in ballots while about 19.2 million have been early in-person voting.¹ The breakdown in terms of voter registration of those who have voted thus far is 49.1% Democrats, 27.9% Republicans, 0.6% other party (such as the Green Party) and 22.4% Independents.¹

Those 59 million votes represent 42.8% of the total votes cast in the 2016 presidential election, which suggests that, when all is said and done, 2020 should be one for the record books in terms of high voter participation.¹ While national polling indicates a solid, consistent lead by Joe Biden, state polling — which is what really matters, given that the electoral college, not the popular vote, determines the president — indicates a much tighter race. I am increasingly convinced that the winner may not be known on election night given that so many are voting by mail, and a number of swing states don’t start counting those ballots until election day. What’s far more troubling is that I believe there is a growing likelihood that the election will be contested. That’s enough to give investors a little dyspepsia.  

Will COVID-19 infections continue to rise?

Then there are the rising COVID-19 infection rates in a number of Western countries. The second wave in Europe is much bigger than the first, with France reaching over 52,000 confirmed infections on Sunday — a new record.² Italy and the UK are also struggling to contain the virus, imposing targeted lockdowns. Other countries, such as Spain, are also seeing a rampant spread of the virus.² In the US, it was reported that there were 78,702 new cases and at least 871 coronavirus deaths on Oct. 24.³ Over the last week, there has been an average of 68,127 cases per day, which is an increase of 32% from the average number of cases just two weeks earlier.³

The US seems to be following Europe’s trajectory, which means November and December could be increasingly worse for America and might include some targeted lockdowns, as we have already seen in Europe. To add to the anxiety, over the weekend, President Trump’s chief of staff Mark Meadows stated that “we are not going to control the pandemic” and said that the Trump administration would instead focus on therapies and a vaccine.⁴ But I believe the medical experts who expect an effective vaccine to be widely distributed by next summer, which means some difficult months ahead for the US. That could create more than a little indigestion for investors.

Is a 2020 fiscal stimulus deal doomed?

Finally, there is the waning possibility of another US fiscal stimulus package in 2020. I am an eternal optimist who has steadfastly believed that politicians’ desire to be re-elected meant there was a good chance that they would reach a fiscal stimulus deal before the Nov. 3 election. Now, even I believe that is becoming very unlikely — even though it is needed now more than ever, in my view, given this new wave of infections.

In the last several weeks, Federal Reserve officials have exhorted Congress to pass a stimulus package. Minneapolis Federal Reserve President Neel Kashkari recently voiced his concern that the economic recovery in the US may decelerate if unemployed Americans and struggling businesses do not receive more assistance, and that thousands more businesses could fail without additional stimulus. He fretted that unemployed consumers who are struggling to pay their bills could have negative repercussions for other parts of the economy. And he reminded Congress that monetary stimulus is no substitute for fiscal stimulus: “If you can’t pay your bills, more quantitative easing is a poor substitute for extended unemployment insurance. … Only Congress has the ability to get that direct fiscal aid to the small businesses and to the Americans who have lost their jobs and who are facing real hardship.”⁵  This comes after his sounding the alarm bells the previous week, warning that a lack of another fiscal stimulus package would bring “enormous consequences.”⁶ Fed Chairman Jerome Powell also earlier this month warned again about the need for additional government aid, saying the consequences of inaction could be “tragic.”⁷

No fiscal stimulus for the next several months has the potential to not only negatively impact the economy — exacerbating the recovery’s ‘k shape’ — but also create a few ulcers for investors.

Six tips for weathering market anxiety

Given all of the above, this autumn could cause some “Pepto Bismol days” for investors — and possibly lead them to make hasty, fear-driven investment decisions. And so I present to you some tips to help weather market-driven anxiety in the upcoming days and weeks:

1. Expect volatility. We have multiple potential sources of uncertainty, which can lead to significant volatility and stock market sell-offs. If you expect this kind of market environment, you are less likely to be rattled by it.
2. Keep in mind there is always some positive news under the scary headlines. We may not know who our next president is on the night of Nov. 3, but we will likely know within a week or a few weeks — and we will certainly know by Inauguration Day in January, which is a relatively short period of time in the grand scheme of things. And fiscal stimulus is not a question of “if” but “when.” We might not get it in 2020, but I believe we are likely to get a significant stimulus package in early 2021. Finally, while COVID-19 infections are on the rise, serious illnesses and deaths are much lower than they were this spring. Last week Dr. Scott Gottlieb, former commissioner of the US Food & Drug Administration, tweeted about two new peer-reviewed studies showing a sharp drop in mortality among hospitalized COVID patients. The drop is seen in all groups, including older patients and those with underlying conditions, suggesting providers are getting better at treating the illness.⁸
3. Don’t make major portfolio changes due to fear. In my view, this volatility likely won’t have a lasting impact on asset classes. It’s critical to stay focused on your long-term goals — and to talk to your financial professional before making major changes to your financial plan, to make sure your decisions align with your goals.
4. Look for opportunities. Uncertainty and hardship have a funny way of creating opportunities. For example, while many Western countries have had difficulty controlling the pandemic, countries such as South Korea, China, and Japan have been very adept at controlling the virus. We could see these countries benefit by attracting more foreign investment and expanding supply chains in their countries. After all, COVID-19 will likely not be the last pandemic we see in our lifetimes, and so the ability to control this virus may confer an advantage for handling future crises.
5. Remember what matters. In my view, monetary policy matters more when it comes to capital markets. In a recent presentation I made to institutional clients, I informally polled them about which factor they thought would have the biggest impact on markets in the near future. The options were fiscal policy, monetary policy, the presidential election, and COVID-19 infections. I was surprised to see that the top answer was COVID-19 infections, as I strenuously disagree. Yes, stocks fell substantially last February and March as COVID-19 spread. However, soon after the Fed began its very accommodative monetary policy response in March, stocks began to rise. The Fed has been a powerful force moving stocks higher. And so while we could see short-term sell-offs related to disappointing news about COVID-19 infections, I believe the very accommodative monetary policy environment we are in will matter more. In my opinion, who runs the Fed is far more important than who sits in the White House.
6. Try to relax. Maybe have some wine instead of that Pepto-Bismol. Pandemics, consequential elections and poor fiscal policy choices have all occurred before, and yet the stock market has survived and risen over time.

I learned a long time ago that there are many things we can’t control — all we can do is manage our reaction to them. The “Pepto-Bismol” days of parenting couldn’t be avoided — skipping that dreaded parent-teacher conference would have only made things worse in the long run — so I leaned on my network of friends to help me get through. Similarly, if the next few weeks end up inducing a bout of investor indigestion, your trusted financial professional can help you stay focused on your long-term goals, make sure that your portfolio decisions are aligned with your goals (and not your fears), and find opportunities that may present themselves.

1 Source: U.S. Elections Project, “2020 General Election Early Vote Statistics,” Oct. 25, 2020

2 Source: The Wall Street Journal, “Europe Imposes New Covid-19 Restrictions as Second Wave Accelerates,” Oct. 25, 2020

3 Source: The New York Times, “Covid in the U.S.: Latest Map and Case Count,” Oct. 25, 2020

4 Source: CNN, “White House chief of staff: ‘We are not going to control the pandemic,’” Oct. 25, 2020

5 Source: Reuters, “Fed’s Kashkari: Recovery will be grinding and slow without more stimulus,” Oct. 15, 2020

6 Source: Business Insider, “Fed’s Kashkari warns of ‘enormous consequences’ if fiscal stimulus is not approved — and says there are no ‘moral hazards’ to supporting more aid,” Oct. 7, 2020

7 Source: The New York Times, “Trump Abruptly Ends Stimulus Talks After Fed Chair Urges Economic Support,” Oct. 6, 2020

8 Source: Twitter

Important information

Blog header image: Leslie Taylor / Stocksy

All investing involves risk, including the risk of loss.

The opinions referenced above are those of the authors as of Oct. 26, 2020. These comments should not be construed as recommendations, but as an illustration of broader themes. Forward-looking statements are not guarantees of future results. They involve risks, uncertainties and assumptions; there can be no assurance that actual results will not differ materially from expectations.

Source: https://www.blog.invesco.us.com/stay-prepared-for-a-volatile-autumn/?utm_source=rss&utm_medium=rss&utm_campaign=stay-prepared-for-a-volatile-autumn

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The great debate on value investing

It seems every week we see articles presenting opposite views on value investing: “Value investing is dead” vs. “Valuation differences between growth and value aren’t sustainable.” Is this time really different?  Can growth continue to outperform with such concentrated leadership?

As value investors, we think that valuations and fundamentals will eventually prevail. However, the million-dollar question is when? Although we don’t know the exact timing, we do have plenty of data to suggest that when this does occur, mean reversion could provide a healthy backdrop for value investing.

Unchartered territory

Prior to this recent period, value underperformance last occurred in the late 1990s, as unprofitable companies created a bubble in a momentum-driven, narrowly-led rally.

Periods of underperformance like this are not new to value investors – they are cyclical. What is unusual is this latest cycle’s duration and the magnitude of the underperformance.

Let’s look at the difference between growth and value stocks over the past decade.

The current growth cycle has been meteoric

Could a rotation be on the horizon?

Source: Kailash Capital.  Data is from 4/30/1989 – 6/30/2020.

During this last cycle, the length and magnitude of underperformance is like nothing we’ve seen in decades. In fact, the dispersion in performance between growth and value is sitting in the 100^th percentile. In other words, we’re in unchartered territory. We must ask the question: Is this sustainable over the long term?  Any investor that has a contrarian bone in their body is scratching their head over this. 

As many of us know, growth has outperformed value by epic proportions recently. Value and growth have always moved in cycles and outperformed each other over various periods of time.  Going back to 1945, value has only underperformed growth during six cycles, with the latest cycle starting in 2010 and continuing now.

Value has underperformed growth only six times since 1945

Source: Copyright 2019 Kenneth R. French at http://mba.tuck.dartmouth.edu/pages/faculty/ken.french/ as of September 2020. All performance information is hypothetical and not the actual performance of an investment fund. Historical performance is not necessarily indicative of future performance. The chart above plots the trailing five-year annualized return of a hypothetical portfolio. When value stocks outperform, the lines go up. When growth outperforms, the lines go down. A value stock is defined as one having low Book Equity to Market Equity. In this case, we are looking at the relative performance of the 20% least expensive companies in relation to the 20% most expensive companies. All returns are compounded monthly.               

As you can see from the chart above, in the latest cycle, there have been a few “head fakes” where value has outperformed growth.  The most prominent period was after the 2016 US presidential election when financials rallied on the hopes of a reprieve from massive regulation, and energy stocks rallied as oil prices moved from the upper $20s at the beginning of 2016 to the low $50s by the end of the year. ¹ 

Historically, value has outperformed leading out of a recession; however, this wasn’t the case coming out of the Global Financial Crisis (GFC). So, why has value underperformed growth by such a large margin and for so long? 

• Economic recovery post GFC was anemic, at best, with GDP averaging only 2.3% for the past decade. ²
• Stimulus from the Federal Reserve (Fed) in the form of keeping interest rates artificially low through quantitative easing.
• Macroeconomic headwinds.
  • Two major oil price wars from Q4 2015 to Q 2016: OPEC increased supply, lowering oil prices to gain market share.
  • China Trade War from 2018 to 2019:  major decrease in global demand.
  • COVID-19 global shutdown: massive drop in demand, affecting most equity sectors, outside of technology.

Market concentration

As we watched the S&P 500 rally through August, it’s important to note what’s actually driving the “market” returns.  The answer is – the “market” isn’t rallying; rather, a handful of stocks have been driving the entire market’s returns.

Most investors are familiar with the FAANG stocks – Facebook, Apple, Amazon, Netflix and Google (whose parent company is Alphabet). Add in Microsoft, and you have the “Sexy Six.”  If you look at the percentage of the total market cap this handful of stocks represent, investors should note that diversification is decreasing in the “market” as a larger allocation is much more concentrated in these stocks. 

The chart below shows the dramatic rise in market concentration of the top five stocks in the S&P 500 Index — today’s concentration levels far exceed the dot-com bubble era of 1999-2000 and are approaching the “Nifty Fifty” era of the 1970s, two bubbles that eventually burst. It is also important to note that the “Sexy Six” stocks represent almost 40% of the Russell 1000 Growth Index. 

Market concentration has increased exponentially in the last few years

Source: Ned Davis Research, Inc. Monthly data 1/31/1972 to 7/31/2020

Now, if you look at the concentration of the top five stocks as of July 31, 2020, alongside their corresponding price-to-earnings (P/E) ratios, as shown in the chart below, it’s easy to see that the market “rally” is only a few stocks driving market returns.  And, those few stocks are trading at extreme valuations.

Just five stocks account for the bulk of returns, while trading at a massive premium to the rest of the market

Source:  Standard & Poor’s, Thomson Financial, FactSet Research Systems, Inc. and Credit Suisse.

Is this time different?

Most investors are looking for diversification to make sure their portfolios have the unique risk/reward characteristics required to meet their investing goals. We believe the concentration risk in the market is a risk many investors are currently taking; it is a risky bet or gamble on prices going higher than the next dollar invested. Both the S&P 500 Index and Russell 1000 Growth Index are currently far from diversified in our opinion.

While the current rally in growth investing seems to be never-ending, now is the time to be reminded of some important rules of investing:

• The fact that no cycle lasts forever is crucial to long-term investing. Understanding investing cycles suggests that after significant outperformance over an extended period, by definition, investments become more prone to drawdowns versus further upside.
• True diversification means parts of your portfolio are lagging, while others outperform (i.e., low to negative correlation between asset classes, styles, etc.)

Now may be the time to consider reviewing your portfolio to ensure you are “truly” diversified. By doing so, you will follow the simple advice that is so difficult for many of us to adhere to – in order to buy something low, you must be willing to sell something high.

Footnotes

1 Source: Yahoo Finance historic WTI oil prices.

2 Sources: The Bureau of Economic Analysis; The Balance, “US GDP by Year Compared to Recessions and Events”

Important Information

Blog header image: PM Images/ Getty

The mention of specific companies does not constitute a recommendation by Invesco Distributors, Inc. Certain Invesco funds may hold the securities of the companies mentioned. A list of the top 10 holdings of each fund can be found by visiting invesco.com.

Before investing, investors should carefully read the prospectus and/or summary prospectus and carefully consider the investment objectives, risks, charges and expenses. For this and more complete information about the fund(s), investors should ask their advisors for a prospectus/summary prospectus or visit invesco.com.

This does not constitute a recommendation of any investment strategy or product for a particular investor. Investors should consult a financial advisor/financial consultant before making any investment decisions. Invesco does not provide tax advice. The tax information contained herein is general and is not exhaustive by nature. Federal and state tax laws are complex and constantly changing. Investors should always consult their own legal or tax professional for information concerning their individual situation. The opinions expressed are those of the authors, are based on current market conditions and are subject to change without notice. These opinions may differ from those of other Invesco investment professionals.

Holdings are subject to change and are for illustrative purposes only and should not be construed as buy/sell recommendations. Past performance is not a guarantee of future results. An investment cannot be made directly into an index.

The S&P 500 Index is a stock market index that measures the stock performance of 500 large companies listed on stock exchanges in the United States. It is not possible to invest directly in an index. Past performance is no guarantee of future results.

A value stock is defined as one having low book equity to market equity and typically trade at low price/earnings (P/E) ratios.  A growth stock is defined as a company that is expected to grow sales and earnings at a faster rate than the market average. Growth stocks typically trade at high price/earnings (P/E) ratios.

Standard deviation measures a range of valuation spread disparities and identifies the level of short-term fluctuations.

The price-to-earnings ratio (P/E ratio) is the ratio for valuing a company that measures its current share price relative to its per-share earnings (EPS)

Value Investing Style Risk. A value investing style subjects the fund to the risk that the valuations never improve or that the returns on value equity securities are less than returns on other styles of investing or the overall stock market.

The opinions referenced above are those of the author as of Oct. 23, 2020. These comments should not be construed as recommendations, but as an illustration of broader themes. Forward-looking statements are not guarantees of future results. They involve risks, uncertainties and assumptions; there can be no assurance that actual results will not differ materially from expectations.

This does not constitute a recommendation of any investment strategy or product for a particular investor. Investors should consult a financial advisor/financial consultant before making any investment decisions.

Source: https://www.blog.invesco.us.com/the-great-debate-on-value-investing/?utm_source=rss&utm_medium=rss&utm_campaign=the-great-debate-on-value-investing

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