by Stephen H. Dover, CFA, Franklin Templeton Investments
On January 5, 2021, the US state of Georgia held runoff elections that determined two Democrats as their US senators, giving the Democratic Party control of the legislative and executive branches through 2022. President-Elect Joe Biden’s cabinet nominations can possibly gain quick Senate approval, and Democratic priorities, such as reducing carbon emissions and protecting labour, may also see swift enactment. Other possible changes:
- We think the market will view the election results as positive because of the increased likelihood for more stimuli, including potential $2,000 stimulus checks for individuals.
- In addition, we believe there will be more federal spending and expect the initiation of big infrastructure and climate-change reduction programmes. Their passage will likely lift infrastructure sectors and “green” stocks, e.g., alternative energy, small capitalisation, construction, and materials.
- With the possibility of some inflation, banks may benefit from higher interest rates.
- We expect additional support for state and local governments, which should be positive for municipal bonds.
- Both corporate and personal taxes seem likely to increase. Corporate tax increases could have a direct impact on a corporation’s earnings and therefore its value in the marketplace. Higher personal income taxes could dampen consumer spending, which perhaps would be offset by additional fiscal stimuli. Any changes to capital gains or estate tax rates might affect individual investment behaviours.
- We think the US dollar may weaken and there may be less trade tension. This can be positive for international stocks, as well as US stocks that have a large ex-US revenue component. We think there are opportunities in international stocks, especially in Asia.
- Some of the highest-flying, best-performing stocks of 2020—mostly big tech stocks—could be hurt by higher tax rates and/or possible regulations. We think there may be opportunities in value stocks as economies begin to reopen.
The biggest risks affecting the recovery remain COVID-19 and its more infectious variants. The good news on new vaccines is hopeful. The rapid, mass, global distribution of COVID-19 treatments and vaccines will have the most impact.
What Are the Risks?
All investments involve risks, including the possible loss of principal. The value of investments can go down as well as up, and investors may not get back the full amount invested. Stock prices fluctuate, sometimes rapidly and dramatically, due to factors affecting individual companies, particular industries or sectors or general market conditions. Value securities may not increase in price as anticipated or may decline further in value. Special risks are associated with foreign investing, including currency fluctuations, economic instability and political developments. Investments in emerging markets involve heightened risks related to the same factors, in addition to those associated with these markets’ smaller size, lesser liquidity and lack of established legal, political, business and social frameworks to support securities markets. Investments in infrastructure-related securities involve special risks, such as high interest costs, high leverage and increased susceptibility to adverse economic or regulatory developments affecting the sector. Municipal bonds are sensitive to interest rate movements, a municipal bond portfolio’s yield and value will fluctuate with market conditions. Bond prices generally move in the opposite direction of interest rates. Thus, as prices of bonds in an investment portfolio adjust to a rise in interest rates, the value of the portfolio may decline. Actively managed strategies could experience losses if the investment manager’s judgement about markets, interest rates or the attractiveness, relative values, liquidity or potential appreciation of particular investments made for a portfolio, proves to be incorrect. There can be no guarantee that an investment manager’s investment techniques or decisions will produce the desired results.
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