Cut through the angst around the election right now. The world won’t end for your clients -- and regardless of political orientation, most of your colleagues have already embraced that fact.
A few days ago, I heard some shocking numbers from an opt-in wealth manager poll on the election. Unlike broader polls, this one didn’t ask who people want to win the White House or even how they’re personally inclined to vote.
It was a lot simpler and more realistic. State Street decided to see who advisors think will win and how the market will react. That’s it.
While the sample was small and grossly unscientific, enough people responded to show us roughly what the advisory community is thinking. Biden probably wins. And the world probably won’t end.
Cut through all the electioneering and media hype and there it is. If your fellow advisors have any sense of the way the political wind is blowing, Wall Street will continue roughly unchanged once the votes are counted.
It isn’t hope. It isn’t even fear. It’s simply a matter of keeping your eyes open and making sure your clients are prepared for a wide range of possible scenarios.
Same as any other election
State Street asked people who attended a recent online presentation to pick one of four election outcomes. Almost half (48.8%) expect a Biden presidency and the market to deliver at least a decent (5% or more) return in 2021.
That might be surprising in light of the prevailing dread that Biden will crash the market. Indeed, another 20.3% of your fellow wealth managers say Biden will win but the market will drop 5% or more in response.
Sadly, the poll didn’t say anything about policy or the macroeconomic cycle. Going back to the Great Depression, the S&P 500 dropped 5% or more about half the time in a presidency’s first year.
It happened to Eisenhower, Nixon, Carter, Reagan and George H.W. Bush. Their collective policies weren’t exactly investor-unfriendly, so a weak first year market is probably more a reflection of the macro moment that brought them to the White House in the first place.
Maybe Biden will buck the trend and destroy capitalism in his first year. I’m not convinced the presidency has gotten that powerful, but welcome arguments to the contrary.
The point here is that your fellow advisors overwhelmingly think he’s going to win and 70% of that group isn’t worried about any immediate market impact.
Naturally, those of you who expect Trump to win another four years are more uniformly bullish. After all, if the votes swing that way, the odds of higher taxes ahead are extremely remote. If anything, we might even get that second tax cut as well as all the stimulus it takes for the country to cheer.
With that in mind, 28.8% of you are looking toward a Trump victory and a market surge. Only 2.1% think that he’ll win and stocks will sink anyway, despite his best efforts.
That logic is fairly straightforward. He’s established his investor-friendly credentials. There’s little chance he’ll actively get in the market’s way. The only real risk is that he’ll fail to give the market what it needs.
All in all, only 22.4% of wealth managers are looking forward to a bad 2021. From a statistical perspective, that’s pretty bullish. We normally brace for a down year about 30% of the time.
Maybe the industry consensus is wrong. Maybe all the polls are completely inaccurate as well.
But on this one at least, there’s zero incentive to hide your real opinion. Nobody asked who you wanted to vote for or who you want to win. There’s no shame or even hope involved in these questions.
I think State Street managed to gauge wealth managers’ mood pretty well. Whether or not we called the shot will be revealed soon.
The big picture
In the longer term, the big strategists have generally guided return expectations lower across the coming decade, but they’ve been doing that for ages.
Setting market targets has become a game of setting the bar low enough that you can make clients happy when you exceed. Right now, the Fed remains in control either way, so it doesn’t matter.
We’re living in a zero-rate world until at least 2022. Free money is unlikely to stop no matter who is in the White House next year.
Free money inflates stock prices even when the fundamentals look miserable. That’s just how it works.
If Biden wins and he goes against the entire political history of Delaware by trying to dismantle capitalism, I’ll be shocked. More likely, one way or another, he’ll do what he can to keep the economy humming.
Likewise, Congress will remain closely divided. We all know how much obstruction the opposition party can throw from either end of the aisle. Sweeping changes are rare without some level of consensus and a whole lot of negotiation.
And this is just the “worst case” for the market. I don’t see tax hikes for at least a few years. The fiscal discipline to argue for them is completely dead in Washington. Trump won’t do it. Biden won’t do it.
At worst, some brackets revert to 2017 levels or close to them. If that’s enough to kill the market, capitalism is a lot weaker now than at any other point in living memory.
Meanwhile, advisors who can manage around the IRS have more room to demonstrate their value. We’ve talked about this. When the tax bill expands, tax-conscious wealth management becomes more important.
Show your clients the numbers and they may not cheer, but they’ll recognize that you’re worth your fee.
But there’s a lot of room for rot in the meantime, don’t get me wrong. Now is the time to make sure your clients can protect purchasing power from any inflation that the Fed spawns.
Maybe there’s no inflation except in asset prices. In that scenario, return profiles that stay ahead of any projected inflation rate will probably generate strong absolute returns and people will be happy.
However, if the cure for the COVID recession is a return to the misery of the stagflation era, it’s going to be hard to engineer big returns until the Fed starts tightening again.
That’s going to play out across years if not decades. Alert advisors will always have time to pivot client accounts. If not, all of us who contribute to the consensus are wrong together.
We weigh the risks on behalf of our clients and hedge against the ones that are most likely to actually happen. We'll talk more about that once the votes are counted and we have a better sense of how the world isn't going to end.
After all, if the world ends, it's too late anyway. But the miracle of the market is that doomsday has yet to arrive.
