Counting continues: Stay calm if markets turn turbulent

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by Paul Christopher, CFA, Head of Global Market Strategy

Key takeaways

  • Expectations for presidential and Senate election results on Election Night gradually gave way to the reality that some states need more time to count the votes.
  • Until clear results are available, financial markets are likely to remain unsettled and highly sensitive to election-related news.
  • We illustrate why pulling out of equities to avoid election-related volatility may reduce portfolio returns. Instead, we favor putting cash to work on an incremental and disciplined basis in our current favorites, which we list.

What it may mean for investors

  • We illustrate why pulling out of equities to avoid election-related volatility may reduce portfolio returns. Instead, we favor putting cash to work on an incremental and disciplined basis in our current favorites which we list.

Early results suggest a close race that is leaving markets in suspense

After the polls closed on November 3, expectations for presidential and Senate election results gradually gave way to the reality that some states need more time to count the votes. By the early hours of Wednesday (November 4), the presidential race was very close, and control of the Senate still uncertain. The prospect of waiting days longer for presidential and Senate election results generated price swings in futures markets overnight, after the polls closed. We expect some additional turbulence over the coming days, and possibly weeks.

The issue is the number of votes to count. Many states reported large turnout and already had in-hand millions of uncounted mail-in ballots as the polls closed. A related uncertainty for the markets is that late counts often come from large counties that may flip the race from one

candidate to the other days later. For example, in Atlanta, Georgia, and Detroit, Michigan, which had very large turnouts, election workers reportedly planned to continue counting absentee ballots on the morning after Election Day, leaving electoral votes unclaimed.

Other states also warned that they anticipate delays, including Nevada (by next week), Pennsylvania (coming days), and Michigan, Wisconsin, and Georgia (sometime Wednesday). Most of these were already swing states, whose outcomes were likely to be close. These four also have the largest remaining electoral vote prizes and should attract the most market attention.

A risk that markets cannot dismiss is that the presidential race could be close enough that candidates could launch legal challenges in states where the winner’s margin was small and the prize is a large number of electoral votes; there also could be challenges over key Senate seats that could help decide the majority in that chamber. Market risk appetite reacted negatively to these possibilities overnight. This problem may still be avoided, however, if the winning margin is large enough that legal challenges have little practical impact.1 In that case, markets may look past the impact of court cases and delays.

Market reactions — overnight and in coming days

Market index prices overnight fluctuated as one presidential candidate led and then the other caught up. Markets steadied only once they determined that the stakes still at risk were in states where counting was delayed. In turn, the election results have implications for 2021 federal spending (generally) and for a January economic stimulus package (specifically). We expect a larger spending package under single-party, Democratic government than under divided leadership between Congress and the White House. All else equal, we believe a larger spending package should boost economic growth and U.S. equities, and increase public borrowing, bond yields, and gold’s price (but push the dollar’s value lower).

By contrast, a reduced prospect of federal spending, both generally and specifically in January, may leave the economy without extra support as COVID-19 infections surge. Reduced public spending and borrowing, in turn, is typically negative for U.S. equities, gold, and interest rates, but supports the dollar. The overnight hours of Election Night alternated between these two scenarios for federal spending, and markets fluctuated accordingly. These same scenarios and market movements may alternate in the coming days, while we all await the final vote counts.

Investment implications

While investors await the election results, we believe strongly that investors should avoid selling risk assets (such as equities) on incomplete or disappointing news, or in response to short-term volatility. Practically speaking, this guidance for patience always raises the question of when to get back into the market, since uncertainties and risks are always present.

Capital markets may fluctuate on legal developments in the coming days or weeks — if legal challenges delay the results — but we still expect that the constitutional measures in place will allow a president to be inaugurated as scheduled on January 20, 2021. We reiterate our guidance that it is too early to shift portfolios for as-yet unknown election results. Instead, we favor allocating cash incrementally and reiterate our preferred asset classes and sectors. Our preferences, shown below, reflect a focus on a wide array of factors, but we emphasize the economy, which we expect to be the same irrespective of who wins the elections.

Wells Fargo Investment Institute current investment preferences

Overall points:

  • Expectations for big January 2021 stimulus, follow-on spending programs, easing trade tensions, and delays in tax hikes reinforce our expectations for economic growth and a weaker U.S. dollar.
  • The makeup of the Senate remains a key for establishing the balance of power in Congress and the prospects for more aggressive government intervention in the economy.


  • Favor U.S. over international equities
  • Favor U.S. large- and mid-cap equities
  • Among large-cap sectors, continue to favor Information Technology, Communication Services, Consumer Discretionary, and Health Care
  • Unfavorable on Energy, Industrials, Real Estate

Fixed Income

  • Favor high-yield corporate bonds
  • Favor yield-oriented sectors, including:
    • Most credit (except commercial mortgage-backed and asset-backed securities)
    • Essential-service, tax-exempt municipal bonds
    • High-yield municipal bonds

Real Assets

  • Favor commodities
  • Unfavorable on public Real Estate Investment Trusts (REITs) overall, but favor REIT sectors Data Centers, Infrastructure, Health Care, Industrial, and Single-Family and Manufactured Homes

Source: Wells Fargo Investment Institute, November 4, 2020.

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1If a presidential candidate were to win enough electoral votes that he could dispense with those from a contested state, the markets could look through that result to conclude that he would still qualify as president-elect.

Risk Considerations

Forecasts are not guaranteed and based on certain assumptions and on views of market and economic conditions which are subject to change.

Each asset class has its own risk and return characteristics.  The level of risk associated with a particular investment or asset class generally correlates with the level of return the investment or asset class might achieve. Stock markets, especially foreign markets, are volatile.  Stock values may fluctuate in response to general economic and market conditions, the prospects of individual companies, and industry sectors.  Foreign investing has additional risks including those associated with currency fluctuation, political and economic instability, and different accounting standards. These risks are heightened in emerging markets. Mid-cap stocks are generally more volatile, subject to greater risks and are less liquid than large company stocks. Bonds are subject to market, interest rate, price, credit/default, liquidity, inflation and other risks. Prices tend to be inversely affected by changes in interest rates. High yield (junk) bonds have lower credit ratings and are subject to greater risk of default and greater principal risk. Municipal bonds offer interest payments exempt from federal taxes, and potentially state and local income taxes. Municipal bonds are subject to credit risk and potentially the Alternative Minimum Tax (AMT). Quality varies widely depending on the specific issuer. Municipal securities are also subject to legislative and regulatory risk which is the risk that a change in the tax code could affect the value of taxable or tax-exempt interest income. The commodities markets are considered speculative, carry substantial risks, and have experienced periods of extreme volatility.  Investing in a volatile and uncertain commodities market may cause a portfolio to rapidly increase or decrease in value which may result in greater share price volatility.

Sector Risks

Communication services companies are vulnerable to their products and services becoming outdated because of technological advancement and the innovation of competitors. Companies in the communication services sector may also be affected by rapid technology changes; pricing competition, large equipment upgrades, substantial capital requirements and government regulation and approval of products and services. In addition, companies within the industry may invest heavily in research and development which is not guaranteed to lead to successful implementation of the proposed product. Risks associated with the Consumer Discretionary sector include, among others, apparel price deflation due to low-cost entries, high inventory levels and pressure from e-commerce players; reduction in traditional advertising dollars, increasing household debt levels that could limit consumer appetite for discretionary purchases, declining consumer acceptance of new product introductions, and geopolitical uncertainty that could affect consumer sentiment. The Energy sector may be adversely affected by changes in worldwide energy prices, exploration, production spending, government regulation, and changes in exchange rates, depletion of natural resources, and risks that arise from extreme weather conditions. Some of the risks associated with investment in the Health Care sector include competition on branded products, sales erosion due to cheaper alternatives, research and development risk, government regulations and government approval of products anticipated to enter the market. There is increased risk investing in the Industrials sector. The industries within the sector can be significantly affected by general market and economic conditions, competition, technological innovation, legislation and government regulations, among other things, all of which can significantly affect a portfolio’s performance. Real estate investments have special risks, including possible illiquidity of the underlying properties, credit risk, interest rate fluctuations, and the impact of varied economic conditions. Risks associated with the Technology sector include increased competition from domestic and international companies, unexpected changes in demand, regulatory actions, technical problems with key products, and the departure of key members of management. Technology and Internet-related stocks, especially smaller, less-seasoned companies, tend to be more volatile than the overall market.

General Disclosures

Global Investment Strategy (GIS) is a division of Wells Fargo Investment Institute, Inc. (WFII). WFII is a registered investment adviser and wholly owned subsidiary of Wells Fargo Bank, N.A., a bank affiliate of Wells Fargo & Company.

The information in this report was prepared by Global Investment Strategy. Opinions represent GIS’ opinion as of the date of this report and are for general information purposes only and are not intended to predict or guarantee the future performance of any individual security, market sector or the markets generally. GIS does not undertake to advise you of any change in its opinions or the information contained in this report. Wells Fargo & Company affiliates may issue reports or have opinions that are inconsistent with, and reach different conclusions from, this report.

The information contained herein constitutes general information and is not directed to, designed for, or individually tailored to, any particular investor or potential investor. This report is not intended to be a client-specific suitability or best interest analysis or recommendation, an offer to participate in any investment, or a recommendation to buy, hold or sell securities. Do not use this report as the sole basis for investment decisions. Do not select an asset class or investment product based on performance alone. Consider all relevant information, including your existing portfolio, investment objectives, risk tolerance, liquidity needs and investment time horizon. The material contained herein has been prepared from sources and data we believe to be reliable but we make no guarantee to its accuracy or completeness.

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