October 16, 2020 – Season 4, Episode 2
In this Special Episode, listen to our insights and thoughts on the election and the impacts it could have on the markets, economy and your investment strategy going into 2021!
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Welcome to CTMA's Podcast. I'm your host Scott Albraccio. Here's an opportunity for us to update you on current market trends and conditions and issues you should be considering when investing in your 401k, wealth management plan, or pre-funding.
We're here talking about the presidential election and some of the impacts it is going to have on the market and the economy, and some of the choices that we make as investors. I've got Chris Abely here with me today who's going to provide us some insight into things that we should be looking at in terms of the election itself and the outcome. So good morning, Chris.
Chris Abely, CFA:
Good morning. There has probably never been a more tumultuous time than the last six months or so, be it the COVID, be it the dramatic change in the economy. Be it the idea that everything is now digital and then to throw all of that, an election on top of it. How political things became that didn't seem to be political. So we are looking at what appears to be dramatically different views of the world. One is a view that the free market and the taxes should be low, regulation should be less than more. And that the private sector is the source of growth.
And then we have the other argument, which is sustainability, the fairness principles with respect to taxes, and also basically a decoupling of the system if the green deal gets put through. And when I say decoupling, I mean consider how much we use energy in the forms that we use it in. Consider how many gas stations there are, consider how many cars there are out there. And we're going to dramatically shift that in the next few years. While there's going to be dislodging of things, there's going to be a slowdown. There's going to be consequences of trying to do that, which may be the answer in the long run, but in the short run, I think there'll be issues and concerns about it.
I want to say one thing for sure is that whoever gets elected, the deficits are going to be with us for a while. So there's just what form that it takes now. How does somebody prepare for basically two alternatives that seem to be diametrically different? Well in the environment we're in, it's diversification. It's making sure that your assets are in multiple places so that they don't sustain a fallout from just one category to move out of the market right before the election. Maybe what some people need to do, because they just are having trouble sleeping at night and that's the cost, and that's the price they'll pay for alleviating the anxiety attached to the idea that there could be a lot more volatility and that the market could re-correct itself.
But by and large, that same person who's going to come out of the market right before the election is going to have to decide when to get back in the market. And the market changes very rapidly. So if you have a plan to get out of the market, I think the most important thing you can do is have a plan as to how to get back in so that you're not doing everything emotionally. But suffice to say in the world that we're working in right now, where the stories get larger and larger and they get promoted in so many different places, be it social media, be it the candidates themselves. It's more than understandable why people have trepidation about what's going to occur.
So one of the things that we've been reading a lot about or you hear a lot on the social media platforms or news is the concept behind if you have a Republican president in a democratic Congress and a Republican Senate, there's all these different iterations of that. I think one of the things that the viewers want to know is there any validity to saying, "Okay, if the presidency goes Democrat and the Congress goes Democrat and the Senate goes Democrat, what happens to the markets historically?"
Or if it's Republican president, Congress is the democratic and Republican Senate like we have right now, how do those interact and interplay with the markets themselves? There's a historical trend that we've seen out there and like to see if you could just shed a little light on that for our listeners.
Chris Abely, CFA:
In the modern times, there haven't been many cases where there were Republicans in both chambers and the presidency or Democrat and in the presidency and a Democrat in the legislation. The one place of recent times was 1996 when Bill Clinton was the president, the market went down after that, the outgoing election year.
Ronald Reagan had a Republican Congress in 1984 and he was obviously a Republican president. The market went up by about 12% and then you have to go back to FDR and Eisenhower. I think what you need to do is assess what the actual policies are going to be and how they're going to impact economics. One of the things that you hear a lot about these days is they call it ESG, which is environmentally, socially, and governance-friendly investing. As that takes more and more hold and that gets how you say favorable treatment from a tax perspective, that would be a place where you might want to lean if you're thinking it's going to be all democratic.
You also need to be very conscious of what will happen from a tax perspective, because of capital gains, if rates change, maybe you should pull them into 2020 as opposed to waiting for 2021. I think that may be a fairly dramatic statement that gets made if, in fact, the Democrat gets elected to the White House because he has said he's going to raise taxes. So I would think that would be a fairly dramatic statement for the market and will be reflected in the market values.
How does the world economy get impacted specifically around like trade agreements? And we've had this ongoing trade agreement or negotiation with China under the Trump administration. If Democrats take over down in Washington, is that going to loosen up trade restrictions? How is that going to help benefit the United States?
Chris Abely, CFA:
I think it's very difficult to assess what the politicians will end up doing with respect to China. And more importantly, how China will respond in light of the recent news with TikTok and a few other things that have been going on. But it has been universally true that as you expand world trade, the world becomes a more prosperous place. Now, if we constrict trade, then there are very good probabilities that the country or the US will experience more growth because we'll be pulling back trade into the United States. Now whether or not in the long run that will put us at a competitive disadvantage or not remains to be seen, but remember we're 330 million people.
We're the largest economy in the world, but you take China with 1.4 billion and India with 1.7 billion. I apologize if I'm a little off on those things. That the growth in the world domestic product will come in the areas where there are the most people. So we should be conscious of that. And I think I said this before, at peak, the US does about 17.5 million cars a year in the US are sold at peak. And China, it's about 30 million.
Wow. Yeah. We've talked a little bit. You brought up the Green New Deal as they've coined it down in Washington. Our economy, our system is really their energy is just built into the United States and oil. What's the decoupling of the energy system going to do? What kind of impact is that going to have here in the United States and abroad?
Chris Abely, CFA:
I think that that's going to play out. I don't think that anybody has a true sense of all the economics of it. I do think that you need to see that we have been and continue to have a lot of equipment related to oil. I mean, you look at Houston, you look at the entire Gulf Coast and the energy that we use through oil is very prevalent. And to the degree that we decide we're going to take ourselves off of oil, we're going to have to do it in a way that hurt some people, hurt some infrastructure. And in the long run, it should be beneficial that we could get our energy from solar or from wind.
However, I think the statistic is right now that solar represents 2% of all the energy that's being used in the world. That oil or carbon represents about 93% I believe in the world of energy usage. The other thing is unintended consequences. Well, Germany has been going through the New Green Deal for the last number of years. What they've actually found is it has the most effect on the utilities. Be it, you might look at it if you're in the New England area, Eversource, there's all kinds of utilities everybody knows around the country, be it the Southeast, the Midwest.
What's happened is that again it's like a decoupling. So where the solar panels are being used, the excess energy in the solar panels are actually being distributed between houses now, as opposed to getting back into the grid, and to the degree that they bypass the grid, they eliminate the need for the electric companies. And that is something that people are just coming to understand.
And the converters and the things that make solar are becoming more competitive. So the real issue becomes how quickly can we shift and not destroy so much of what we've built? But I challenge somebody to in the next hour that they're out driving, look at all of the places where oil is used and how long is it going to take us to come off of that?
And unwind it. Yeah, sure. Well, that covers our talking points on the presidential election. I'll leave you with some final comments.
Chris Abely, CFA:
What I just said vis-a-vis the oil industry is not a political statement. It's just these are the facts. There's this much here. There's this much here. And if you want to take the preponderance of everything we do and move it to someplace else, you've got close to eight billion people out there it's going to take a longer time than people might think.
Chris Abely, CFA:
As a last point, people have asked me, "Where do I think?" I think that you can do data centers comfortably for yields. You can do different solar investments or ESG investments to protect you in a new green economy. There are ways in which you can protect yourself.
Thank you for listening to our podcast. I hope you found that informative. Don't forget to subscribe to our channel and never miss an episode.