On the brink: U.S. election special edition

- According to my next guest, the number one question on investors' minds these days is, what impact will the US election have on my investments? His report is titled "On the Brink-- US Special Election." And joining me now is Brad Simpson, Chief Wealth Strategist at TD Wealth.

Brad, you wrote very eloquently in your report as you always do-- and I quote you here-- "market noise right now has reached a deafening crescendo amplified by social media, cable news outlets, and two very well-funded political parties that are trying to convince American electorates that a calamity is going to ensue if the wrong president is elected." Is all that noise useful? I know it's not. And where is your headspace in all this?

- First, it's hard not to watch. It's like a brawl on a sidewalk, but you want to walk away, but you just can't-- you just keep watching it. And you know, I think that really a good way of looking at this is that we humans really, really like to have the ability to have somebody be able to tell us the future. That's why you can still walk through a mall on a weekend, see a psychic fair or you open up a newspaper, and you can still see astrology tables.

But at the end of the day, no one knows what an outcome is going to be. But what you can really know is you can know how you're positioned and how you're going to think moving into something. So for me, I look at it and go, it's really not about what I think. It's how I think. And when I think about how I think about things and go, well, let's say if you can't make a prediction, let's look at 2016.

You have a campaign that most people thought that Hillary Clinton would win. She lost. And we would be in the camp we thought the same thing. We also thought that a Clinton win would be lousy for equity markets. And so when Trump won, the following day we went overweight US equities. We adapt. You make changes as you go along.

We also knew that we went into that campaign in 2016, that we were well diversified. That's what you're doing in 2020. You're not putting everything on what you think an outcome is going to be that no one can predict. You're thinking about the environment in which you're managing and how am I structured to go through that?

- I was just going to say, I think to your point, there's so many major influential things going on, of which probably the US election is ranked in third place behind COVID-19 and Modern Monetary Theory-- Monetary Policy 3, as you've called it. And we're going to get to all those. I do want to delve into each one.

But I want to bring up a chart here that you actually have in your report, because it's great information. You actually have a piece here that shows that despite what people think in terms of when Republicans get elected, markets go up, when Democrats get elected, markets go down. That's actually not what has happened historically.

- No. Actually, if you wanted to have a case study in confirmation bias, this would be a terrific one. I mean, if you spend your days reading financial press or are watching it on TV or just listening to conversations, there's this, well, Republicans are good for financial markets, Democrats are bad for financial markets.

And what we did is we went back and said, OK, let's test this out. So we went back to 1900, and we ran the rate of returns for the S&P 500, so looking at 120 years worth of data. And then we broke it down three ways. So if you look at the phase of time between 120 years, returns when Republicans were in, which was 54% of the time, returned 7.9%, when the Democrats were in, it's 12%.

Then we said, OK, let's look at 1945 to 2020. When Republicans are in, the rate of return's 8.4%, when the Democrats are in, it's 14.4%. Then we said, OK, let's look at 1972 onwards, because it is really the dawn of the era of modern monetary policy, if you will. And when we look at that era, we said, well, the Republicans when they were in power, which was 59% of the time, the rate of return of the S&P 500, 7.5%, the Democrats is 15.2%. So really, the facts don't bear out the fears that we have around this narrative that we keep telling ourselves over and over again based on, again, the stories that the marketers tell us what each of these parties stand for.

- Brad, you've also brought some pieces together where you took a look at, given the platforms that we know right now that are coming out from both parties, what the impact could be on the asset classes. So let me ask you, what does, I guess, a Trump platform-- and I'm assuming this is Congress, as well, going Republican-- what does that actually mean? What could happen?

- Well, I think you're going to see in either case continued fiscal stimulus. And Trump, you're going to see additional corporate tax cuts, probably more deregulation, and that's the positive. The negative is more geopolitical uncertainty and tensions, and tariffs, and a lot of the things that we've seen for the last few years.

So when you net that out of the fiscal and still supportive of monetary policy, you're going to see neutral for fixed income. Equities is kind of a neutral to a positive. And for real assets, the goal for the fiscal, which you could see more infrastructure spending and stuff that they talked a lot about in the first term, in the second term they would probably do more of. That's a neutral to a positive as well.

- All right, let's talk about if the other party comes in-- it's a Biden platform. And again, I'm assuming Biden's strength or Democrats' strength Congress and in the White House. What do you see there?

- Well, again, you're right, a little more fiscal stimulus spending, but it's where you're going to be doing it-- health care, infrastructure, environmental programs, support for small businesses, for low income citizens and local governments and probably more funding in those sort of areas. On the negative, looking at more tax increases for corporations, for the ultra wealthy, for the kind of spending effect. We see more taxes there. If you break it down, fixed income is kind of a neutral, if you will. Equities neutral to a positive. And real assets, again, with the spending that we would see would come in infrastructure, and particularly in green infrastructure, it's a positive as well.

- So you and I have talked about over the last few months, and you alluded to just a few minutes ago, actually, that the US election is one-- even though it's front and center right now-- it's only one factor that you really need to weigh when you're taking a look at the markets right now. I want to bring up another chart that you talked about in your report, where you have risk factors and then the conditions. And maybe just talk a bit about that and what you think is notable in this.

BRAD SIMPSON: I think these are kind of what we try to frame out to go, where are we in this? So number one condition is still COVID-19. But unlike when we moved into this, we're no longer like a deer in the headlights. We are managing this.

Yes, the numbers are escalating right now. Full lockdown is highly unlikely. And our ability to be able to manage this pandemic now is much better than it was five months ago. We know the US election is an uncertainty, and I think we've really covered that.

Global recession-- we're moving out of that. Actually, the economy continues to surprise on the upside. I think one of the concerns people have is saying, well, listen, this massive market rally is already done. We think there's a two-tier market where you have a handful of expensive names and THE whole rest of the market that has been ignored. So in many ways, it's an active manager's dream out there right now.

Corporate earnings are terrible? Well, they continue to surprise on the upside. They have been bad, but they haven't been as bad as we were expecting them to. So we actually see that as a positive trend. Credit markets have narrowed, so, yes, they've stabilized. So probably the spreads aren't as good as they were before.

And the Fed has used up all its levers. Listen, the bottom line is we've moved into a whole new era for monetary policy where central banks and governments are going to work together on funding on infrastructure and globally, and they're going to be accommodative for whatever it takes to be able to keep people employed and keep income coming in. And I think they've only done a few of the steps of where they're really going to go with this. And again, the US and China tension, which is still lasting, but it's still a known unknown.

- It's a long list there. And I actually think one of the most interesting things, after you lay out here's what could happen with the election and here's all the factors we're watching, and at the end of the paper, you wrote, "markets and polls aside, we believe basing an investment strategy on the outcome of the upcoming election is a futile exercise, since it's still pretty much a coin toss." So what do you do?

- Well, I think the starting point is just don't waste time and emotional energy on things you cannot control. Watch the election and read about it, but know that as an investor, there is no action that you're going to take, good or bad, that is going to make a difference with this. The difference is going to be is that you be properly diversified whatever the outcome is, and good or bad, you will do well through it.

And the third part really is to know when we get to the place, whatever step that we are at, there is an awful lot of things that are going to make financial markets move. Monetary policy, fiscal policy, all the effort we're working towards working towards controlling this pandemic are still the two biggest inputs that we're going to think about. That's true now, and that's going to be true after this election.

- And I think you and I have often talked about too is know thy self as much as you can, or at least work with people who know you, maybe better than you know thy self.

- Yeah. I think that is the key. And we've spent an awful lot of effort here. I know comfortably moving into this that I'm going in and working through this crisis surrounded by people who score really high on conscientiousness, which means they're cool and calm and make good decisions under pressure. And they're also very low on reactiveness, which means that when things change, they don't immediately make a reaction to it.

So I think it's important for folks to understand that if you're not that way, is just to make sure you surround yourself with an advisor or a person or somebody who is that stabilizing force that are helping reinforce that you make good decisions in times when it seems really difficult to do so.

- Brad, it's always a pleasure. Thanks so much.

- Thank you.

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