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After the Vote: What Comes Next?

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COVID-19 Insights Research & Strategy November 05, 2020
COVID-19 Insights Research & Strategy November 05, 2020
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Early U.S. Election Results: What We Know

With U.S. presidential election results still hanging in the balance, BMO Capital Markets hosted a client call to discuss investment strategy based on what we know so far. The call, hosted by BMO Capital Markets Chief Investment Strategist Brian Belski, also featured expert commentary from Margaret Kerins, Managing Director and Head of FICC Macro Strategy, and Michael Gregory, Deputy Chief Economist and Head of U.S. Economics.

BMO plans to hold a follow-up call as results are finalized. Please stay tuned for more information.

Our experts urged caution around premature investment decisions ahead of final results, and instead focused on what we do know, like the likelihood of a gridlocked Congress and what that will mean for stimulus, future leadership of the Fed, and the importance of equity markets to overall portfolios.

Listen to full discussion.

Focus on Growth

At the top of the call, Brian Belski urged listeners to trust the process and turn off the rhetoric until each state certifies the election.

“We think it's way too early to make any kind of rash portfolio decisions in both Canada and in the United States,” he said. “This has been an emotional year that has impacted all of our lives, from a personal level to an investment level. And we have to continue to control what we can control.”

From an investment standpoint, Belski recommended a fundamental strategy to buy scarcity and sell capacity, focusing on growth.

“So, what does that mean? From a scarcity proposal, we want to buy quality assets, where we know the businesses,” he said, advising investors to focus on the three different categories of growth: secular, structural and cyclical. “It’s bottoms-up fundamentals that matter again. We want to focus on growth (because) when growth is scarce, growth outperforms.”

In the United States, Belski said BMO Capital Markets remains overweight in technology stocks, communication services stocks and consumer discretionary stocks, as well as parts of staple retailing, parts of financial, and select healthcare companies. In Canada, he said his team is overweight in communication services and financials.

Belski ended his commentary by calling for investors to focus on the positive, and reiterated his forecast of a U.S. equities market still in the midst of a 20-year bull market.

“We continue to believe that equities in the United States and Canada are the best home for assets with respect to equity assets in the world,” he said.

Skinny Stimulus Bill

BMO Capital Markets Deputy Chief Economist Michael Gregory also advised caution around strategy until we have clear data on who the next president will be. What we can speculate about, he said, was on the impact of a likely divided Congress and implications for future fiscal stimulus.

“It looks like we are headed toward a divided Congress and therefore a situation where it may be difficult to get the kind of fiscal stimulus bill that was envisioned in a blue wave scenario,” Gregory said, predicting a “skinny bill”, regardless of who ends up winning the presidency.

He said that because of the change in the monetary policy framework, the Fed’s future policy should turn out to be “very politician friendly”, and “we all know that it looks like we probably won't get rate hikes by the Fed till maybe 2024 at the earliest.”

Gregory said the key economic focus remains on COVID-19 and rising infection rates on both sides of the border and the impact on reopening plans.

On the tax front, we also know that whoever wins the presidency will have to deal with a growing national debt, which will impact both tax and spending policies over the medium- to long-term.

Near-term Volatility

BMO Managing Director and Head of FICC Macro Strategy Margaret Kerins noted that the fight against the pandemic and search for a vaccine will continue to weigh on markets, although a sizable fiscal stimulus package will be unlikely with a divided Congress, even in the case of a Biden win.

“If Biden does win, we do think the prospects for a sizable fiscal deal are certainly dwindling, and this is being priced into the Treasury market,” she said, saying the fight against the pandemic will still weigh on either president and decisions around stimulus. “I think a small package is still possible … given the rising infection rates, which are reversing the reopening effort.”

Noting near-term volatility in market pricing overnight and into Wednesday amid classic short-covering behaviour, she said her team maintains its call for 10-year yields approaching the 1 percent level.


ELAINA: Good morning, ladies and gentlemen. Welcome to the post-election market outlook conference call. I would now like to turn the meeting over to Brian Belsky. Please go ahead, Mr. Belsky. 

BRIAN: Thank you so much, Elaina, and good morning, everyone, I think it’s morning. Long night for everyone. We’re going to try our best to provide the best guidance that we can here. On behalf of BMO Financial Group, thank you so much for joining us today. We stand at the ready to provide you with additional research opinions when we know the final conclusion and we will be doing another call like this and we can obviously provide more conclusive evidence, but this is a very important day. This too shall pass, we have to trust the process and we can avoid brash and binary decisions with respect to all of our environments and that’s why we’re blessed and fortunate to be on a call such as this today. We are joined on the call with our Deputy Chief Economist, Michael Gregory, our Head of Fixed Income and Commodities and Currency, Margaret Kerins, and myself, Brian Belsky, Chief Investment Strategist at BMO Capital Markets. We’ll round out our commentary with respect to investment strategy in terms of both the U.S. and Canada. We will have time for Q&A shortly. Again, we want to try to provide as much clarity as we can for you, and as a resource, we are here. And so with that, I will hand the ball off to Deputy Chief Economist Michael Gregory. Go ahead, Michael. 

MICHAEL: Well thanks, Brian. We’re all watching the televisions or the wire services to see how the election is unfolding and it’s pretty clear that the ballots are still being counted and particularly in counties that could still altar a state’s result, and this is an important thing to keep in mind here, this thing is not done yet. Even this morning, as we’ve been preparing some of our reports, we’ve seen both Wisconsin and Michigan go from a Trump leading state to a Biden leading state and we’ll probably get a lot more of that back-and-forth as these final ballots get counted. As it stands right now, and this is according to the Wall Street Journal, given where we are right now in the electoral college vote with Biden at 238 and Trump at 213, and that’s according, again, to the Wall Street Journal and they’re using the AP’s tally that there’s some 18 ways for Biden to pick up the 32 votes he needs and 9 ways for Trump to pick up the 57 he needs, which is why market base stocks still see a Biden victory at this point. In terms of the Senate race, the margins and some of the undecideds are a little bit wider than we’re seeing at some of the more contentious states and, as a result, it’s sure looking like that the Republicans will hold on to the Senate. In fact, we may end up with the same counts we had before the election and, of course, the House is still being controlled by the Democrats. So, what’s the take-away here, so far? Not knowing who is winning the presidency, or rather who will win, one thing is pretty clear that it looks like we’re heading to a divided Congress and therefore a situation where it may be difficult to get the kind of fiscal stimulus bill that was envisioned in a blue wave scenario, for example, and I think that’s one of the first take-away is whatever sort of expectations you had on that kind of fiscal stimulus bill, I think, you got to think about what’s been referred to as a skinny bill or something small like that to get through and that’s kind of regardless who wins the presidency. But nevertheless, we’re still watching that sort of quite closely and while we may not get the kind of fiscal relief that maybe we thought we could get, the fact of the matter is the near term prospects for the U.S. economy particularly will be driven by, you know, what’s been happening with the Canadian economy, will be driven by what’s happening on the COVID-19 infection front and rising case rates on both sides of the border and the increasing restrictions and reversal of reopening plans that are resulting in jurisdictions across the border. I think that’s the ultimate factor that is going to be affecting growth in the near term. There are some implications here and I think Margaret refers, again, to this in some depth with the prospects for a blue wave and a big budget deficit and things like that, you know, it’s been good news for the treasury market, going forward. There are also some implications here regardless who wins and particularly for the Fed, you know, Fed chair Powell, that 10-year does end in 2022, so whoever is president is going to have to reappoint him, potentially. You know, obviously with Trump criticizing him quite openly in the past, one would think that his days may be numbered there, he won’t get reappointed and even under Biden, Powell being a Republican, maybe he doesn’t get re-nominated as well, but keep in mind that Powell was nominated to the Board of Governors under the Obama administration as an appeasement to a Republican led Senate at the time. So in fact we happen to think that Powell has a good case here of actually getting re-nominated for the simple reason that the Fed’s change in its monetary policy framework has become extremely politician friendly and we all know that it looks like we probably won’t get rate heights by the Fed until maybe 2024 at the earliest. Now if it turns out that Biden does, you know, manage to get a victory, obviously there’s the issue of who is going to be the new treasury secretary and on the short list there has been mentioned that Fed governor Brainard and, of course, that would open up another vacancy on the board and, by the way, there’s also the fate of the 2 Trump nominations, Judy Shelton and Christopher Waller, to the Board of Governors. Waller, of course, had bipartisan support in committee and still has to face a full Senate vote. Shelton’s nomination was more controversial, whether on party lines and there are a number of Republicans that even don’t support her candidacy, so again, we’ll have to see how that unfolds, going forward. And finally, a new treasury secretary may take a more lenient attitude towards the Fed’s lending programs. As you know, the treasuries were afforded the Fed a lot of capital to support these programs and it has been argued that maybe the restrictions on that have been a little too difficult or onerous for both lenders and borrowers and maybe that can be loosened up a little bit. Finally, implications for Canada and the Canadian economy from the outcome, obviously if Mr. Trump proves victorious, it’s status quo and therefore little change from what was happening over the past 4 years. If we end up with a Biden presidency, and again, that’s where the market odds seem to be pointing towards, but, you know, that would be with a, you know, congress with a potential for gridlock, it’s unlikely that anything major can get done, but of course, the presidency does have some power on things like trade and things like energy. Mr. Biden has already indicated that he would pull the permit for Keystone XL, which, of course, would have implications for the energy sectors specifically. I’ll leave it here for now, I know we probably have some Q&A coming afterwards, but I’ll pass things over to my colleague, Margaret Kerins. 

MARGARET: Thank you, Michael, and thank you everyone for dialing in today. I’ll start off in terms of the market pricing overnight and this morning. We have had a pretty large swing in both 10s and 30s by making basis points in 10s and 24 basis points in 30s, bringing our stats down to the lower ends of the recent range. I think this is a classic short covering move, and what’s going to be really interesting is to see where we settle as the day and probably today and tomorrow as we get through today and tomorrow, we do think that will remain at the lower end of the range and 10s will likely test 70 basis points, but ultimately, we are holding our calm for the resumption of the bear flattener into year end with 10-year yields once again approaching the 1% level. That said, we do think that we’re in for a couple of days of volatility here and, you know, I think Michael already mentioned this a little bit. Prior to the election with the White House and the Senate both Republican and Trump even favouring a larger fiscal package, then the Republican senators, an agreement was unable to be reached on fiscal stimulus. If Biden does win, we do think the prospects for a sizeable fiscal deal are certainly dwindling and this is being priced into the treasury market. We think a small package is still possible and it’s really based on many of the states remaining in various stages of shutdowns, given the rising infection rates, which are reversing the reopening efforts and this is where the market’s focus on fiscal stimulus is playing a role. One of the ways that we have been bringing up the market is really, as we’re moving through time, we’re overcoming some of the hurdles and one of the big hurdles is the election. So hopefully within the next, you know, day or two or couple of days, we will have the results hopefully sooner rather than later and the markets will once again be fully focusing on the path of the pandemic and the success of the vaccines, moving towards vaccines. So the issue with the fiscal stimulus is that the timing does matter because the purpose of it is to provide a bridge to both individuals and companies in order for them to survive the economic damage that is occurring because of the pandemic and the longer the pandemic continues and, you know, the shutdowns, re-shutdowns are occurring, the greater the potential damage and without that fiscal stimulus, we could have the need for even more stimulus or halts later on. You know, the size of it does matter because it needs to be large enough to provide the support needed to the various sectors, but not so large where money is being thrown into areas where it’s not needed. And, of course, we do have to currently pay all this back at some point in the future. So once we do know the election results, like I said, we will be moving past that and, you know, it’s not necessarily who wins the presidency at this point, given that it’s expected for the Republicans to maintain the Senate and the Democrats to hold the House, which will provide some level of gridlock. I think that the market is really going to continue to focus on when we are going to get a state effective and widely available vaccine and the first major step will, of course be, the next hurdle will be will people take it and that will be what the market is going to watch. As I said, we do expect this bearish impulse in treasury to continue into year end. In terms of IG credit spreads, we’ve seen very, very minor moves on the back of the current uncertainty. We’re about a basis point tighter this morning, spreads are, and continue to be, the post-pandemic type, it’s still about 30 basis points wider than the January type. The IG market is fabricated just like every other market and ultimately it all depends as does the race market on the recovery in jobs and the fabrication in the IG market has featured, you know, very, very strong winners in this and very strong losers. And even, you know, if we don’t get a fiscal plan, we do think that spreads should go a bit wider into year end just given the implications for the credit market, but ultimately once it’s clear that we have a vaccine widely available, we do think that IG spreads will move back to the pre-pandemic type. So, on that, I will pass it back to Brian Belsky and thank you. 

BRIAN: Thank you, Margaret and Michael, great comments. With respect to investment strategy and how we’re going to be investing through this, we published a piece early this morning entitled “We will know when we know”. Our research, as all of BMO Capital Markets BMO Financial Group research, is located on the website and also please reach out to your relationship manager in terms of getting on these lists. Clearly the duration and clarity are keys to provide much needed confidence with respect to an eventual decision. That’s why we’ve been very steadfast with respect to our overall investment strategy for all of 2020. This has been an emotional year that has impacted all of our lives from a personal level to an investment level and we have to continue to control what we can control. From an investment standpoint, we want to buy scarcity and sell capacity, so what does that mean? From a scarcity proposal, we want to buy quality assets where we know the businesses. We want to focus on themes and stock picking in bottoms up fundamentals that matter again. We want to focus on growth, when growth is scarce, growth outperforms. So what does that mean? I think it’s way too early to make any kind of brash portfolio decisions in both Canada and the United States. There are 3 parts to grow, there is secular growth, there is structural growth and there’s cyclical growth. There are parts of cyclical growth that clearly benefit the values category, but again, per Margaret’s comments with respect to what interest rates are going to do, it’s going to be very difficult for many of the value categories, especially, financials from a broader perspective to make money and be very, very tight net interest margin environment that Michael foretold with respect to the Fed not doing anything for as much as 3 years. So what does it mean for equity? It means that higher risk premiums and zero risk-free rates will benefit equities, going forward, but it really goes back to behind the scarcity proposal and knowing from a fundamental perspective what your profit is, sticking with that and turning off the rhetoric. Now, we’re going to be hearing obviously a lot about opinions, some non-objective, some objective with respect to what could happen. We don’t know what’s going to happen exactly up until on a state-by-state basis when the states actually ratify and certify this election. Until then, we have to stay in our lane, control what you can control, stick with your process and your discipline and focus on quality and buying that scarcity proposal knowing what you’re buying. So that being said, we maintain our positions with respect to being overweight technology stocks, communication services stocks and consumer discretionary stocks in the United States, as well as parts of staples retailing, parts of financials mini money centre banks and brokers and very select healthcare companies. In Canada, with overweight communication services and financials, we believe dividend growth is going to be an excessively important theme, going forward, and now that it looks as both Michael and Margaret talked about, that we are not going to get the blue wave, the tax consequences and the negative consequences on areas like utilities, especially in Canada, communication services and financials are going to not be the bigger impact that many people feared with respect to the dividend taxation side of things. And we do believe given the low interest rate environment that equity incomes is going to be a very, very important wave. Again, we stand at the ready in terms of BMO Financial Group and BMO Capital Markets with respect to further data and for the calls, we will open up to another call once we have a conclusive end to this. And with that, Elaina, if we could open up the lines for questions, that would be great. 

ELAINA: Certainly, thank you. If you have a question and you’re using a speaker phone, please lift your handset prior to making your selection. If you have a question, please press star-1 on your device’s keypad. If at any time you wish to cancel your question, please press the pound sign. Please press star-1 at this time if you have a question. There will be a brief pause so participants can register. Thank you for your patience. 

BRIAN: Thank you, Elaina, and while we wait for questions to queue, I would ask Michael Gregory a question with respect to his comments on the Fed. Much has been made of the potential duration of a non-Fed change in terms of tone and strategy. What would you kind of be looking for though, however, not to put the cart in front of the horse, but in terms of language, or is there something very specific in the years it looks like maybe or the months ahead to really signal to you and your great economic team with respect to a potential change in tone from the Fed? 

MICHAEL: Well, I think the Fed has been very clear about, you know, what it’s looking at, going forward, and it wants to see inflation that is moderately above 2% for some time. We’re still far away from that, we’re not sure exactly how much is moderate and how much it’s for some time, but clearly, it must be meaningful, so they don’t expect to be raising rates for a while. More importantly, though, it’s on a jobless rate. You know, those 2 years before the pandemic hit when we had the unemployment rate running below the natural rate or the long term unemployment rate for those 2 years, and in those 2 years, we saw basically no inflation pressures whatsoever and a very welcomed social broadening of job gains and wage gains. And that is precisely where the Fed would like to be again and, therefore, you know, as long as the unemployment rate cruise stubborn and quite frankly with you know, 2 and a half million Americans for example now deemed permanently unemployed because of the pandemic, you know, that suggests that you know, the unemployment rate is going to prove stubborn and slack in the labour market is going to be an issue for many, many years and, therefore, you know, I think it’s only when we start to see, either, number one, those inflation pressures, you know, become more persistent core PC inflation running consistently above 2 and a half per-cent for over a year, something like that, right? And on top of that, you know, the unemployment rate continuing to fall well then, yeah, okay, maybe I can see some tone by the Fed, but quite frankly, you know, as I mentioned in my opening comments, this is a politician’s dream in terms of a central bank. Basically, they are the politician’s friend, they won’t be raising rates. The notion of taking the punchbowl away just as the party starts is no longer on the order book. 

BRIAN: Thank you, Michael. Elaina, do we have any questions from the queue? 

ELAINA: Thank you. As a reminder, please press star-1 at this time if you have a question. Our first question is from Scott Switzer. Please go ahead, your line is now open. Scott Switzer, your line is now open, please proceed. If you are using a speaker phone, please lift your handset or unmute your line. Hearing no response, we will move on to the next question which is from Bob Burke. Please go ahead, your line is now open. 

BOB: I was wondering if you had any comments in terms of tax policy in regards to capital gains. Do you see any major changes or insights into that? 

BRIAN: Michael, why don’t you go ahead and take that and then I’ll follow through. 

MICHAEL: Sure. Well, I mean, obviously, with a divided Congress getting any kind of tax measures through is going to be prove problematic no matter what, you know, if you know, a presumptive Biden presidency and he’s kind of favoured, you know, those kind of tax increases. And so it doesn’t seem likely at this point in time. That said, you know, all bets are off beyond the next few years as Margaret indicated in her comments, I mean these big budget deficits we’re seeing now may have been necessary. They have overdone it a little bit on some of the programs but we’re going to tailor make them a little bit or finetune them, going forward, but those big budget deficits are going to persist for a long time and it’s not a sustainable situation so we’re going to have to right the fiscal ship, which means that down the road, it’s inevitable we will get higher taxes and lower spending than would otherwise have been the case. So you can’t rule out that, say, you know, over sort of a 4 to 8 year horizon but over the next several years, probably not. 

BRIAN: I think that’s right, Michael, thanks for clarifying some of that. I do think that at least, again, taking a more intermediate view of the next 1 to 3 years, it’s clearly continued to play a bid with respect to what’s going on in terms of stock and again to regroup and reiterate our comments with respect to equity income. Equity income has been a strategy that’s underperformed this year, especially given the intent focused on growth facts but I do think that in a gridlock environment that we’re clearly heading into, will clearly think help out the equity income side in terms of dividend taxation as well. With that, Elaina, can we go back to the queue please? 

ELAINA: Certainly, thank you. Once again, please press star-1 at this time, if you have a question. There are no further questions registered at this time so I’ll turn the meeting back over to you, Mr. Belsky. 

BRIAN: Great, thank you very much. I think we need to focus on the positive here and the positive is: this will come to an end and we will move on from this, number one. Number two, you’ve heard from our best and brightest minds with respect to a macro perspective in terms of what’s happening in investment from the economy improving, to the Fed being supportive, to stimulus coming, to interest rates remaining low, we think those are a positive backdrop for North American investments in general. From an equity perspective, we continue to believe that the U.S. equity market is in the midst of 20-year bull market. We continue to believe that equities in the United States and Canada are the best homes for assets with respect to equity assets. In the world, we think that the current backdrop from the macro perspective that you heard today, clearly benefits that. Again, we at BMO Financial Group stand at the ready to provide you with additional clarity once we have a decision in terms of the president of the United States. We will be doing another call and we hope that you will join us. In the meantime, please get some rest, keep the faith and we will prevail. Thank you so much for joining us today. 

ELAINA: Thank you Mr. Belsky. The conference has now ended. Please disconnect your lines at this time and we thank you for your participation. 

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Brian Belski Chief Investment Strategist
Michael Gregory, CFA Deputy Chief Economist and Managing Director

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