WHY THE U.S. ELECTION IS VASTLY OVERHYPED FOR INVESTORS
Tom Bradley sheds light on the factors he believes will drive your portfolio returns.
I really don’t want to write about the U.S. election, but I feel I must. It comes up in almost every client meeting. Why the reluctance? Well, there’s no other way to put it — the U.S. election is seriously overhyped when it comes to investing. It doesn’t crack my list of top 50 factors that will drive portfolio returns over the next one, three and five years.
I know what you’re thinking. How can that be? The next U.S. president and Senate majority will set policy related to trade, health care, and the environment. Yes, the pace of progress in these areas will be affected, but the impact will be modest compared to the influence of broader economic and social trends.
Unfortunately, a list of these trends is too long to cover here, but hopefully a sampling will reveal where the Nov. 3 outcome ranks. Few of the factors appear to have the immediacy of an election, but any change in sentiment or direction can quickly affect corporate fortunes.
LIFE AFTER LOCKDOWN
Near the top of the list are issues related to COVID-19. The timing and efficacy of vaccines will be huge, as will the availability of cheap and reliable testing.
The strength of the economy will depend on how remote the hybrid work model turns out to be and therefore, how much office space, support services and transportation are needed. Spending patterns will be shaped by how and when the lockdown losers — travel, vacations, conferences, and sporting events — come back into the mix.
DEEPLY I N DEBT
We’ve become addicted to cheap money. It’s the cure of all ills. We now find ourselves, however, walking a debt tightrope, which makes almost any bond market factor more important than the election. I’m referring to inflation, default rates, credit spreads and the overriding fundamental question: Who is going to buy all these bonds?
Investors are gradually shifting away from low-yielding bonds and governments already find themselves going to lenders of last resort — the central banks —, to fund deficits. There’s no election result that provides comfort to investors in this area. Both parties plan to spend beyond our means and send the bill to future generations.
MAKING THE OLD ECONOMY NEW
I’d need the whole newspaper to list how digitization and artificial intelligence are redefining entertainment, retailing, health care, and well, everything. If that isn’t enough, there are new questions entering the tech conversation — how will the splintering of the internet (into U.S. and China versions) affect the tech giants and to what degree will privacy concerns and increased regulation slow the exploitation of user data?
Technology is also revolutionizing one of our biggest industries — energy. The transition from fossil fuels to renewable energy has started and is being driven by economics, not government regulation. The cost competitiveness of solar, wind and storage is attracting capital that was otherwise intended for
oil and gas.
The world economy isn’t new, but its makeup is steadily changing. If we look outside of our North American bubble, we see Asian and African countries growing their share of the pie. The emergence of their middle classes couldn’t come soon enough.
As a reminder, the oldest baby boomer is turning 75, which means less consumption, less tax revenue, changing real estate needs, and lots more health care.
MORE DEMANDING I NVESTORS
The election seems trivial when compared to changes going on in the corporate world. COVID-19 has forced companies
to shift from “just in time” to “just in case” inventory. Corporate executives and investors are coming to grips with the cost of more diverse supply chains and increased safety.
Companies are also being forced to deal with issues that weren’t previously on their income statement — the “environment” and “social impact.” Again, it’s not being driven by government initiatives but rather a growing emphasis by investors on environment, social, governance, or ESG.
Good corporate citizens are already garnering premium valuations. It will be increasingly important to avoid companies that get thrown in the penalty box (with fossil fuels and tobac
co). Will it be tech companies that are controlled by a handful of people (governance) and are playing fast and loose with data (social)?
Clearly, the government in Washington will affect how these trends progress but make no mistake, they are playing catch-up.
Consumers and corporations are moving forward faster and more forcefully and having a bigger influence on your investment returns.