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Altering your portfolio based mostly on this alternative could be a mistake because the Fed could have an even bigger position to play

altering-your-portfolio-based-mostly-on-this-alternative-could-be-a-mistake-because-the-fed-could-have-an-even-bigger-position-to-play

A person walks past a boarded-up Saks Fifth Avenue on November 1, 2020 in New York City. Corporations have made it their business to open storefronts in anticipation of unrest related to the presidential election.

David Dee Delgado | Getty Images

Moving your portfolio based on election results has been a risky strategy in the past and may be this year when multiple variables are in the air about the future of the economy and markets.

Wall Street is full of strategic advice on how to either play a new Joe Biden presidency or play Donald Trump for another four years. Biden, for example, is widely seen as a fan of alternative energy and infrastructure games, while Trump is seen as an ally of fossil fuels and big industry.

However, according to Andrew Slimmon, Senior Portfolio Manager at Morgan Stanley Investment Management, the post-election landscape can often be very different from the pre-election landscape. Investors shouldn't put too much emphasis on political makeup.

This time around, investors should instead watch what he calls the post-election "excellent" landscape set up by an accommodating Federal Reserve that will continue to drive market returns until conditions change.

"It's more interesting to talk about Donald Trump or Joe Biden than about Jerome Powell," Slimmon said, referring to the two candidates and the Fed chairman, respectively. "Fed policy is difficult to get a grip on."

However, it was the central bank's approach to interest rates and other aspects of monetary policy that has helped or hindered the market, beyond the policies of the candidate who is elected.

Looking at recent history, it would have been easy to believe that George W. Bush was the pro-business president when he was elected in 2000. But the market collapsed after he took office.

Conversely, many companies feared that Barack Obama would not be their friend when he won in 2008. Still, stocks did well after these elections.

The difference: The Fed tightened its policy in 2000 to contain the excesses of the dot-com bubble, while it eased in 2008 to save the economy from the consequences of the financial crisis and the accompanying great recession.

"Anyone who bought stocks after George Bush was elected or sold stocks based on Barack Obamas was focused on the wrong thing," Slimmon said.

When Trump was elected in 2016, the wisdom of the convention was that banking and energy stocks would do well. Instead, they followed the market.

However, the Trump market was not as dependent on Fed policy as some of its predecessors. The Fed contracted during the early years of the 45th President's tenure, and stocks did well nonetheless. The market lost much of its steam, however, when the Fed announced it would tighten further, and it wasn't until the historically loose policy of the pandemic left stocks pick up speed.

Slimmon added that it is more than a simple Fed that is driving returns.

The strategy

Not only have corporate earnings been good, but CEOs have so far been making positive predictions for the third quarter earnings season at a 2-on-1 pace, according to FactSet. Economic momentum also appears strong: GDP rose to a record 33.1% year-on-year in the third quarter and manufacturing activity hit a two-year high in September.

In all of this, a friendly Fed serves as an important tailwind.

"You still have the Fed," said Slimmon. "I would argue that what the Fed does is far more important than who wins the election."

From an investment perspective, Slimmon favors stocks left behind by the popular stay-at-home trading of 2020. Big Tech has taken the market leadership. Investors have preferred companies that are best prepared to win when economic activity is constrained.

"On the whole, I would be very interested to know that there are many industries that will have very easy comparisons next year. There will be companies that will have very difficult comparisons next year because we all stayed at home." he said.

"I don't think it's just value stocks," he added. "There's a whole bunch of growth stocks that have been hammered this year, like travel and leisure. There are some growth stocks that look more appealing to me. They happen to be in areas that have suffered this year."

On the other hand, he expects the introduction of a Covid-19 vaccine could mark the end of the current cycle.

"My basic view is that the market will do well until we get out of this pandemic. By that point, I think if we have a vaccine, Wall Street will have raised its prospects and margin estimates will have risen and this one Ability to hit gets harder, "said Slimmon. "I don't think the Fed will change its policy [immediately], but they will start changing the rhetoric and then it will be harder for stocks."

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Katherine Clark