Show Transcript
With no official results, we could be heading into an extended fight for the U.S. presidency. What does this mean for financial markets and could it delay the long-awaited stimulus package for U.S. workers? Kim Parlee speaks with Robert Vanderhooft, Chief Investment Officer, TD Asset Management.
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- It was a tumultuous and uncertain night for the US election, though it looks like it may be turning into an uncertain and tumultuous few days and weeks. Here to tell us what that could mean for the markets, Rob Vanderhooft. He is Chief Investment Officer at TD Asset Management.
Rob, good to see you. I want to start with I guess maybe what the market was pricing in versus what we know now and that is that the blue wave doesn't look like it's going to happen.
- Good morning, Kim. Yeah, certainly the markets were expecting a much more decisive victory by Biden. The polls were all indicating that. If you looked at 538, I think it was 90% probability of a Biden victory. So again, we're in that uncertain territory which we were concerned about coming into this election. And then similarly, with respect to the Senate, it was expected generally that the Democrats would gain control of the Senate, which doesn't look that likely to happen now.
- What does that mean? Again, from an investment thesis standpoint, when you look at, I guess, gridlock or just things not having that ability just to sale policy through when it's all with a Democrat or Republican, what does that mean for the markets?
- Well, what it looks like now, and obviously it could change, it looks like Biden still likely to be president. More likely to see a continued Republican Senate. We do get more gridlock then.
And It does make it much more difficult for Biden to pivot to a bit more of a leftist agenda, which would be the higher tax rates, higher capital gains tax rates, higher dividend tax rates, higher personal tax rates. The $2 trillion green initiative becomes a little more difficult to make that happen. So in some senses, gridlock is often positive.
- Is it a positive-- and I understand what you're saying in terms of seeing big changes from taxation standpoint, but what about from a COVID standpoint? I mean, the country, as we are, is still caught in a pandemic needing to get stimulus out there. So when I hear gridlock, I know there's been some concerns about getting the stimulus out to help people right now.
- Yeah, I think the gridlock, with respect to the pandemic, won't be an issue. I think that very likely we'll get another stimulus package very, very shortly. It may not be the magnitude that it would have been under a Biden presidency, but again, there wouldn't be a transfer power until the new year in any event. But we do need a stimulus package before that. So I still think that it's likely to happen.
And on the pandemic side, I think there has been some positive news with respect to things like T cell response. With respect to now there's 11 vaccines in stage three trials. So I think we've made significant progress there as well. And I wonder, at this point, if that's having more of an impact on the markets than the election.
- What do you see for the States in terms of economic growth? I mean, the one thing you're going to have, hopefully to your point, vaccines get developed and rolled out. I mean, that's a big part. You've got some stimulus, hopefully, bridging some of what's going on right now, but what are you seeing with in terms of the gridlock and the election and the division? I mean, the one thing this election has solidified is there's a lot of division right now, and what that could mean for the economy.
- Yeah, I don't think it has short-term implications for the economy. I think there's long-term implications in terms of how big that divide is. If you watch Fox News versus CNN, it's a different planet. That's a long-term concern about social cohesion in the US and what implications that has.
What we don't typically see is that elections have a short-term impact on economic growth, and they have a moderate impact on longer-term economic growth depending on what policies come into place. Under a Biden administration, higher tax rates offset by probably higher infrastructure investment. So to a degree, they do offset, and we probably end up with reasonable economic growth.
- What are we seeing with the technology stocks today, that was interesting? We saw a bit of due risk in some of the markets. And we're seeing a rally, can you explain what's happening there?
- Yeah, that may be related to the split in power between the President and the Senate in terms of not being able to affect those expected tax increases, and that may have had an impact on the technology sector.
- Final question for you. When you take a look at your positioning from a TD Asset Management perspective, I know a point in time, a day, does not shift a strategic positioning, but are you seeing anything now? And what will you be watching to influence your thoughts on that?
- It doesn't change really our longer-term view. We do have a modest overweight in equities. We'll continue with that. Relative to fixed income, we certainly feel that the equities offer a better a risk-reward characteristic.
If you look at where interest rates are now, really quite low, we're seeing negative real interest rates. With the amount of stimulus that's gone to the economy, with the amount of expected stimulus that's going to come into the economy, we would expect interest rates to stay very low for a very long period of time. So that does tilt you towards equities, towards yield assets, towards alternative assets as well in order to generate better diversified returns. So we're still optimistic in terms of economic growth and equity markets in general, but we do see more muted returns relative to probably the last 10 years.
- Rob, always a pleasure. Thanks so much.
- Thank you.
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Rob, good to see you. I want to start with I guess maybe what the market was pricing in versus what we know now and that is that the blue wave doesn't look like it's going to happen.
- Good morning, Kim. Yeah, certainly the markets were expecting a much more decisive victory by Biden. The polls were all indicating that. If you looked at 538, I think it was 90% probability of a Biden victory. So again, we're in that uncertain territory which we were concerned about coming into this election. And then similarly, with respect to the Senate, it was expected generally that the Democrats would gain control of the Senate, which doesn't look that likely to happen now.
- What does that mean? Again, from an investment thesis standpoint, when you look at, I guess, gridlock or just things not having that ability just to sale policy through when it's all with a Democrat or Republican, what does that mean for the markets?
- Well, what it looks like now, and obviously it could change, it looks like Biden still likely to be president. More likely to see a continued Republican Senate. We do get more gridlock then.
And It does make it much more difficult for Biden to pivot to a bit more of a leftist agenda, which would be the higher tax rates, higher capital gains tax rates, higher dividend tax rates, higher personal tax rates. The $2 trillion green initiative becomes a little more difficult to make that happen. So in some senses, gridlock is often positive.
- Is it a positive-- and I understand what you're saying in terms of seeing big changes from taxation standpoint, but what about from a COVID standpoint? I mean, the country, as we are, is still caught in a pandemic needing to get stimulus out there. So when I hear gridlock, I know there's been some concerns about getting the stimulus out to help people right now.
- Yeah, I think the gridlock, with respect to the pandemic, won't be an issue. I think that very likely we'll get another stimulus package very, very shortly. It may not be the magnitude that it would have been under a Biden presidency, but again, there wouldn't be a transfer power until the new year in any event. But we do need a stimulus package before that. So I still think that it's likely to happen.
And on the pandemic side, I think there has been some positive news with respect to things like T cell response. With respect to now there's 11 vaccines in stage three trials. So I think we've made significant progress there as well. And I wonder, at this point, if that's having more of an impact on the markets than the election.
- What do you see for the States in terms of economic growth? I mean, the one thing you're going to have, hopefully to your point, vaccines get developed and rolled out. I mean, that's a big part. You've got some stimulus, hopefully, bridging some of what's going on right now, but what are you seeing with in terms of the gridlock and the election and the division? I mean, the one thing this election has solidified is there's a lot of division right now, and what that could mean for the economy.
- Yeah, I don't think it has short-term implications for the economy. I think there's long-term implications in terms of how big that divide is. If you watch Fox News versus CNN, it's a different planet. That's a long-term concern about social cohesion in the US and what implications that has.
What we don't typically see is that elections have a short-term impact on economic growth, and they have a moderate impact on longer-term economic growth depending on what policies come into place. Under a Biden administration, higher tax rates offset by probably higher infrastructure investment. So to a degree, they do offset, and we probably end up with reasonable economic growth.
- What are we seeing with the technology stocks today, that was interesting? We saw a bit of due risk in some of the markets. And we're seeing a rally, can you explain what's happening there?
- Yeah, that may be related to the split in power between the President and the Senate in terms of not being able to affect those expected tax increases, and that may have had an impact on the technology sector.
- Final question for you. When you take a look at your positioning from a TD Asset Management perspective, I know a point in time, a day, does not shift a strategic positioning, but are you seeing anything now? And what will you be watching to influence your thoughts on that?
- It doesn't change really our longer-term view. We do have a modest overweight in equities. We'll continue with that. Relative to fixed income, we certainly feel that the equities offer a better a risk-reward characteristic.
If you look at where interest rates are now, really quite low, we're seeing negative real interest rates. With the amount of stimulus that's gone to the economy, with the amount of expected stimulus that's going to come into the economy, we would expect interest rates to stay very low for a very long period of time. So that does tilt you towards equities, towards yield assets, towards alternative assets as well in order to generate better diversified returns. So we're still optimistic in terms of economic growth and equity markets in general, but we do see more muted returns relative to probably the last 10 years.
- Rob, always a pleasure. Thanks so much.
- Thank you.
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