Post-Election, a Diversified Portfolio is Needed
investing-my-money | Read Time: 3 minutes
By David Navarro, CFA® | Published: November 2020
One could argue that if there ever is a time to stress diversification in an investment portfolio, it would be 2020 post-election.
Markets are forward looking, constantly trying to price today what they feel the future will bring. During an election year, that means pricing in policies and agenda items of the eventual winners of the presidential and congressional elections.
This year also has the added consideration of a global virus that greatly affects certain aspects of the markets.
Every person across the country typically focuses on the presidential elections, but potentially even more important this year were the senatorial races. As of the writing of this article, Republicans hold 50 seats and Democrats hold 48 seats with two still outstanding.
However, the two Senate races in Georgia are still undecided and will remain that way until early 2021. Under Georgia law, a race must advance to a runoff election if no candidate received over 50 percent of the vote. Both Georgia Senate races have resulted in zero candidates receiving over 50 percent of the vote, resulting in runoff elections for both seats on January 5, 2021. Until then, political control of Congress is uncertain.
What does this mean for markets? During President-elect Biden’s campaign trail, he proposed the idea of raising the capital gains tax rate. A capital gains tax rate increase retroactive to January 1, 2021, might incline investors to sell their winners before that date, thus paying less in taxes.
What companies have generally been the winners this year and for the last 3-5 years? The tech companies. With polls showing Biden ahead, the tech sector declined for a few weeks leading into election night. However, the chances of a capital gains tax increase were lowered by what is looking like a Republican-controlled Senate (although still undecided as previously mentioned), resulting in gridlock across Washington.
Another aspect of the markets that is potentially affected by this likely gridlock is the small cap space. A Republican-controlled Senate lowers the amount of the potential fiscal stimulus bill. What companies need fiscal support the most?
Small cap companies hurt by the shutdown that don’t have the large balance sheets to weather a shutdown or slow economic reopening. For a few days after the election, the small cap indices underperformed.
To throw a monkey wrench into all these post-election market dynamics, potential successful vaccine news the week after the election dismantled the technology stocks versus small cap stocks dynamic that occurred immediately after the election. Small cap indices skyrocketed from the chance of a faster economic re-opening due to a vaccine that would alleviate some of the populations’ concerns of becoming infected.
On the flip side, the technology names that were rewarded from the potential gridlock in Washington were punished by markets, mainly because they are viewed as the work-from-home investments, benefitting from shutdown fears.
Short term market dynamics can cause discomfort for investors. Discomfort can be alleviated with a well-diversified portfolio. Within a diversified portfolio, rebalancing opportunities can occur during these extreme short-term market movements. Every circumstance and event is unique, bringing many questions to market participants each time they occur. In my opinion the ideal solution this year, and every year, is a diversified portfolio based on an investor’s objective.
About the Author – David Navarro, CFA®
David Navarro, CFA® is the Director of Research at West Capital Management, a subsidiary of WSFS Financial Corporation. West Capital Management focuses on developing custom planning and investment strategies tailored to each client’s unique circumstances and greater ambitions. David graduated with a B.S. in Finance from Rutgers University. He can be reached via email at email@example.com.
This communication is provided by West Capital Management (“WCM” or the “Firm”) for informational purposes only. Investing involves the risk of loss and investors should be prepared to bear potential losses. Past performance may not be indicative of future results and may have been impacted by events and economic conditions that will not prevail in the future. No portion of this commentary is to be construed as a solicitation to buy or sell a security or the provision of personalized investment, tax or legal advice. Certain information contained in this report is derived from sources that WCM believes to be reliable; however, the Firm does not guarantee the accuracy or timeliness of such information and assumes no liability for any resulting damages. Any reference to a market index is included for illustrative purposes only, as it is not possible to directly invest in an index. Indices are unmanaged, hypothetical vehicles that serve as market indicators and do not account for the deduction of management fees or transaction costs generally associated with investment products, which otherwise have the effect of reducing the performance of an actual investment portfolio.
WCM is the business name of WSFS Capital Management, LLC. It is an SEC registered investment adviser that maintains a principal place of business in the Commonwealth of Pennsylvania. The Firm may only transact business in those states in which it is notice filed or qualifies for a corresponding exemption from registration requirements. For information about WCM’s registration status and business operations, please consult the Firm’s Form ADV disclosure documents, the most recent versions of which are available on the SEC’s Investment Adviser Public Disclosure website at www.adviserinfo.sec.gov. WSFS Capital Management, LLC, is a wholly owned subsidiary of WSFS Financial Corporation.
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