As final ballots continued to be tallied in crucial swing states, the markets seem to have accepted and embraced the idea of a divided government.
The Dow Jones Industrial Average and the S&P 500 rallied 2% on Thursday morning, putting the indices on track for their best performance since April.
Although a great deal of the election uncertainty has passed, markets could still fluctuate in the coming days and weeks as legal challenges to the election remain underway.
A team of senior investment strategists from Wells Fargo Investment Institute, which has been keeping a close watch on the election results, suggests that while it may be too early to shift portfolios based on half-known results, investors could raise some cash right now to prepare for the opportunities ahead.
Led by Darrell Cronk, chief investment officer for wealth and investment management, the strategists laid out their specific recommendations in stocks, bonds, commodities, and tax strategies during a client call on Wednesday.
Stocks — resurfacing of the work-from-home trade
With a divided Congress, the beneficiaries would be stocks that are less reliant on a big stimulus package, according to Sameer Samana, senior global market strategist.
“They are more your secular organic growers,” he said of such stocks. “So think technology, healthcare, e-commerce, communication services that have either been boosted or at least left unscathed by COVID-related impacts.”
Without the anticipated blue wave, there is also much less consensus on the possibility of sweeping regulation of tech and healthcare companies, which in part drove up the two sectors on Wednesday.
“If you think about what the near-term drivers will be now that you have this contested outcome, it will be things like COVID, the possibility of stimulus getting pushed back,” he said.
He continued: “You are going to see a little bit of a resurfacing of that work-from-home trade and that’s going to be technology, consumer discretionary, communication services, and healthcare, which today were the four best sectors and coincidentally our four favorite sectors.”
Bonds — taking more risks for yield
As the chance of a big and quick fiscal stimulus package dwindles, some investors have already looked to the Federal Reserve for more actions, but they should not hold up their hopes too high, according to Brian Rehling, head of global fixed income strategy.
“The Fed, they have lots of capacity. They can provide liquidity in markets,” he said on the call. “They can’t really put dollars in a consumer’s pockets. I mean they can in a roundabout way with lower mortgage rates, lower debt rates. But in reality, that takes a lot of time to filter through.”
Ultimately, the bond market will be driven by the coronavirus pandemic instead of how the election goes, he said.
“The bond market will quickly move on after recalibrating this election,” he said. “And I think the focus is going to go back to COVID both in terms of how the virus is progressing and also how the vaccines progress.”
He explained: “If it’s bad news, it’s not inconceivable that 10-year rates could put in new all-time low… On the other side, if the vaccine proves to be quite effective, maybe we can put this behind us sooner rather than later. And then we can see the 10-year move up to 1.25% to 1.5%. That’s definitely within the realm of possibilities.”
However, for yield-starved investors, Rehling suggests taking more risks in fixed income portfolios by looking at municipal bonds, high yield credits, and preferred securities.
“We’ve been recommending, for those clients that can take advantage of being in high effective tax brackets, municipal securities continue to look very good to us,” he said. “We would actually recommend, if you have some flexibility, moving down the credit spectrum a bit, perhaps into some of the better high yield credits.”
“And then, finally, a recommendation that we’ve had out there for some time: preferred securities. If you are really yield-hungry and income-hungry, that’s a good place to look,” he said. “If you are looking for stable value, that might not be the best choice. But if you’re willing to hold through some volatility for that higher income stream, that could be a really good choice.”
To be sure, Rehling believes that investors should use active managers to execute these recommendations due to the expertise needed in selecting the right credits within the right sectors.
Commodities — a 24% upside for gold next year
With expected volatility and inflation ahead, investors should also consider allocating 2% to 3% of their portfolios to diversified commodities, according to Tracie McMillion, head of global asset allocation strategy.
“Commodities, in general, are a good diversifier in allocations and that’s because they tend to have different return patterns than many of the other asset classes,” she said on the call. “That said, they tend to have really long cycles and we might be nearing the end of the latest bear market cycle in commodities.”
Specifically, McMillion is positive on gold and believes it could rally 24% through next year.
“I think going forward, the possibility of a weaker dollar and lower interest rates should be favorable for gold and precious metals in general,” she said. “In terms of our target, next year’s target for gold is $2,300 to $2,400, that’s about 24% upside from here.”
Tax strategy — think about wealth transferring
Now that a blue wave is almost off the table, investors should have more time to respond to any tax policy changes, which are unlikely to be implemented in the near-term in a gridlocked government.
Lisa Featherngill, head of legacy and wealth planning at Abbot Downing, advised investors to not be thrown off by the uncertainty of the election and of how tax policies might look like over the long-term.
But for those who have an estate of over $11.7 million, Featherngill said it is worthwhile to think about “gifting strategies” now to take advantage of the temporarily doubled exemption in estate taxes.
“We’ve been encouraging clients to go ahead and take advantage of this trifecta of temporarily doubled exemption, decreased value of assets, and the low-interest rates with an abundance of interesting types of wealth transfer strategies that are available,” she said.
While some clients have been hesitant to transfer wealth given the recent volatility, Featherngill believes that there is a chance that the temporarily doubled exemption could be reversed prior to its scheduled several in 2025.
“It’s a lot of money that’s at risk, so it doesn’t make sense to wait,” she said.