October 29, 2020Mac McLaughlin

Election Season is Coming - Hold Tight

If you have turned on the news, read a newspaper or frankly had a conversation with anyone in the past few weeks, I know that you are well aware that “this is the most important election of our lifetime.”

That is of course until 2024, which will then be the most important election.

In our last update 13 Days...., we discussed potential income tax changes that could result from the outcome of the election. But how are these election results actually determined? Believe it or not, the term “college” doesn’t just mean “the best four years of our lives” – it has a much more important meaning when it comes to US elections. The Executive position is not determined in a “winner take all” fashion, but rather is determined by the electoral college which convenes every four years to elect a President and Vice President on behalf of their voters. To learn more about the electoral college, what it is and how it works, please read the PDF primer - The-Electoral-College.pdf.

What to expect
While we don’t have a crystal ball that will tell us the results of the elections, we do feel confident that there will be volatility between now and then in the markets. If results are contested, the VIX (volatility index) will remain elevated until the courts determine who won the election. In 2016, the market traded lower by 3.0% between 10-27-and 11-4, and the VIX elevated each day. We suspect history is repeating or at least rhyming with 2016.

What should we do?
Hold Tight – we have been preparing portfolios well beyond election results.

Wellspring remains focused on 2021-2022 and a post-COVID world. Specifically, we are positioning portfolios, albeit modestly, to benefit from the following:

Rising inflation and sustained low real yields, favoring inflationary protected bonds-TIPS, and corporate bonds
A weaker dollar, and ongoing devaluation of fiat currencies, favoring gold and international funds
The likelihood of a fiscal stimulus package (regardless of election results), supported by low-interest rates, favoring infrastructure and REIT funds

What Happens if (Insert Candidate) wins, and the Senate is controlled by (Insert Party Here)?
Below is a slide that we shared with you in your 3^rd Quarter Investment Report market slide deck. The main takeaway? Market performance does not show a preference to the characteristics of government control – thus, we will continue to focus on the underlying data that supports our long-term asset allocation decisions to continue to perform throughout market cycles.

This next week will have many headlines, but we will fight the urge to react and instead remain focused on our long-term investment and financial goals.