Americans woke this morning with little clarity from Election Day. Once Florida was recognized as a battleground state win for President Trump, it became obvious the Biden landslide predicted by many pollsters was off the table – and everyone was in for a long night. As of this writing (morning of 11/4), the US Presidential race is undecided with key swing states (Pennsylvania, Michigan and Nevada) still up for grabs. Legal challenges are a near certainty and investors should be prepared for a drawn out process before an outcome is determined.

While not official, it is becoming more clear that the likelihood of a “Blue Wave” (i.e., a Biden win coupled with a Democratic Senate and House majority) has faded. Democrats needed to pick up three seats with a Biden win and four with a Trump win. They appear to be at least one short. Below is a chart illustrating the PredictIt-implied probability of Democrats gaining control of the Senate.

Financial markets have largely taken all of this in stride. Equity futures did exhibit some volatility overnight as the certainty of an outcome became less likely, but the market did not appear caught off guard. Bond yields rose initially on Tuesday – perhaps expecting a Democratic sweep that would lead to a larger fiscal stimulus package – before falling later.

So where does this leave investors? Markets don’t like uncertainty so it shouldn’t surprise anyone to see a period of elevated volatility during this time.

There is a temptation for investors to “do something” when facing uncertainty and volatility – and it doesn’t get more uncertain than today. But a look back at the 2016 Presidential election offers insight to how difficult it is to not only to predict an election outcome, but to translate that prediction in markets that are forward-looking. Equity futures quickly fell to “limit down” as it became obvious President Trump would upset Hillary Clinton. By the end of the next day markets completely reversed and an equity rally ensued.

As long-term investors, we should instead focus our attention on strategic decisions that are equally important the day before an election as the day after, and relevant regardless of who is in the White House. Here is a short list of themes that fit this criteria:

1. Bonds will play a different role – Low starting yields will limit the diversification benefits of bonds. The importance of other uncorrelated strategies relative to equities will play a key role in portfolios. Bonds will continue to be essential for a counter-cyclical rebalancing of capital and a source of short-term income needs.
2. Additional fiscal stimulus is on the way, either way – While the composition and size of a fiscal stimulus package will change depending on the election outcome, it is coming. The fiscal response to this point of the COVID-19 crisis is already 3x what was implemented in the 2008 Financial Crisis. Dollar weakness, a decline in US household savings and an increase in money velocity would all point to budding inflation concerns.
3. The rearview mirror will lead us astray – The US equity market has trounced international and emerging markets equities over the last 10 years. Don’t assume that relationship will hold over the next 10 years. The prospects of a globally diversified equity allocation are most promising at precisely the moment prior returns argue against it.

The lack of clarity in the US election could remain for several days, or longer. It is a significant moment for the economy and the future path of fiscal policy. But we caution clients against overemphasizing the meaning and importance of any resulting short-term market volatility. As the final results of this election come into focus, we will work to assess how it could impact longer-term return assumptions, if at all.

As an acknowledgment of our inability (or anyone else’s) to predict a specific path for the markets, our goal is to build portfolios that are resilient to different outcomes, including elections. So for now, and with confidence in our approach, we wait…