The Georgia Election and The Markets

The Georgia Election and The Markets                                          

Many clients are wondering what impact the results of the Georgia election will have on their portfolios.  While no one knows for sure, here are some potential outcomes given the Democrats will have control of Congress and the White House.

1. The day after the election saw a spike in stocks, primarily in financials, small caps, and international stocks.The gains remained even after the nation’s capital was overrun by pro-Trump protesters.Technology stocks lost some ground, but their losses were pretty muted for the most part.As we have commented in the past, the stock market often trades around narratives and the current narrative is that the Democrats will be able to spend more on infrastructure projects, potentially provide more stimulus payments and support state and local governments more than would have been the case under a divided government.This can be seen as reflationary and could make the economy grow quicker over the short-term.
2. A reflationary economy will most likely see an uptick in inflation and interest rates.Because of this, the 10-year Treasury Bond exceeded 1% for the first time since last March the day after the election.The Federal Reserve will continue to keep short-term rates low, but it is not out of the question for the 10-year Treasury Bond to close closer to 2% than 1% by yearend.This is what has prompted a jump in financial and small cap stocks.Financials should perform better in a rising interest rate environment and small caps should perform better in a fast-growing economy compared to large cap growth stocks, which have done incredibly well over the past few years.
3. Increased government spending and higher debt could drive the dollar weaker, which would be good for international stocks, especially emerging market stocks.This is a theme we have been writing about for a while, but it seems to be finally happening.
4. Rising interest rates are bad for long-term bonds because the price of bonds runs inverse to interest rates, meaning if interest rates go up the value of bonds goes down and longer duration bonds lose more than shorter duration bonds.Because of this dynamic we are trying to reduce interest rate risk in many portfolios by using shorter duration bonds.
5. If the rotation out of growth stocks into value stocks (like financials and healthcare) continues, it does not mean growth stocks must collapse.It just means they may lag the returns of value stocks as long as economic growth is strong and interest rates move up.

These are challenging times to manage portfolios, however we believe staying balanced and diversified continues to be the best strategy for helping our clients reach their long-term goals.  We always welcome any questions or concerns you may have regarding your investments, the markets, or the economy.

The Bond&Devick Team