Elections' Results Might Be Unclear, But Not Market's Reaction
Submitted by LWM | Linden Wealth Management LLC on November 5th, 2020
While the elections' results might be unclear, one thing that isn't is the market's reaction.
The markets are leaning toward Republicans keeping control of the Senate and divided government. The results aren't final, but if it holds, significant policy changes will be less likely, particularly for taxes and the size of additional stimulus.
If this remains the case, and the status quo prevails, investment themes that have been driving the markets since Covid should continue:
- Technology, growth, and quality outperform
- Value and small caps underperform
Performance YTD: Growth, Technology, and Value:
Changes to corporate, individual, and capital gain tax rates become less likely. All of this favors the more profitable growth sectors like technology, justifying higher P/E ratios.
Based on valuations and other considerations, we remain convinced that a rotation to value will happen at some point, but an investor must be careful as to timing. When sectors reach extreme valuations, whether high or low, they historically mean revert.
Professor Jeremy Segal holds a similar view expecting value's underperformance cycle to end in 2021 based on cheaper valuations and higher yields. It's an informative interview worth reading when you have a chance.
For the time being, we retain our tilts toward technology, growth, and quality that have served us well in the last few years while keeping a close eye on equity valuations and changes in the market.
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*This content is developed from sources believed to be providing accurate information. The information provided is not written or intended as tax or legal advice and may not be relied on for purposes of avoiding any federal tax penalties. Individuals are encouraged to seek advice from their tax or legal counsel. Individuals involved in the estate planning process should work with an estate planning team, including their own personal legal or tax counsel. Neither the information presented nor any opinion expressed constitutes a representation by us of a specific investment or the purchase or sale of any securities. Asset allocation and diversification do not ensure a profit or protect against loss in declining markets.
