WRITTEN BY: VANCE HOWARD & WILL STARK

In most people’s minds, the outcome of Presidential and Congressional elections determines the direction of public policy for the next handful of years. It seems that this year, the outcome of these elections holds far greater weight than just legislative changes. There is increasing uncertainty about whether a clean result will even be generated, let alone what the impacts of those outcomes are. While the outcomes of these elections are not always straightforward, we at Howard Capital Management, Inc. would like to offer a few key trends that investors can use to potentially profit from a shift in power.

Cyclical Outperformance

Based on historical market trends, cyclical sectors tend to perform slightly better during Democratic regimes. The themes for 2020 and the next 2-3 years are likely to continue in the direction of cyclical sectors like Technology, Consumer Discretionary and Energy while the US economy is in a recovery phase. However, if a “Blue Sweep” were to occur, we wouldn’t be surprised to see a broad market selloff. These reactionary selloffs are usually prompted by increased regulatory and geopolitical uncertainty, of which we seem to have no shortage of recently.

There is also tremendous uncertainty surrounding the Energy sector and whether a Biden Presidency would add or detract from that sector. Generally, when we see peaks in uncertainty there is a subtle correlation with positive future returns. We must consider the possibility that, if we see a Blue Sweep the “Green New Deal” policies have a chance of being implemented earlier than expected. Thus, renewable, and sustainable energy sub-sectors could seek to benefit from this regulatory initiative. For Energy specifically, it’s currently plowing through its third-lowest support point since the bottom in late March. It’s far too early to tell which way the sector will go, but it’s a sector that could show tremendous promise in the next 18-24 months.

Technology has held up extremely well through 2020 and considering how COVID-19 will affect the working world for the foreseeable future, we maintain the view that Technology will continue its relative outperformance of other cyclical sectors. While most are concerned about extended EPS ratios, anti-trust suits, regulatory probes, etc. the investors that have ridden the Technology wave through 2020 have profited greatly. Whether it’s time to take gains off the table is something else investors should ponder. Biden has explicitly stated he will raise the capital gains tax to the ordinary income rate for those earning more than $1mm.

Contrarian View

The outcome of the Congressional elections is as important – if not more so – than who is sitting in the Oval Office in January. The probability of a “Blue Sweep” brings far more uncertainty to the markets than a Biden presidency and mixed Congress would. Two of the worst scenarios for market growth historically occur with a Democratic President/Mixed Congress or Republican President/Mixed Congress. Contrary to popular belief, a gridlocked Congress is relatively stable for the markets as they know exactly what they’re getting, nothing.

What Can I Do Now?

Knowing that volatility is expected to rise over the coming weeks, what are investors to do? Our simple answer: Do not make knee-jerk reactions on your own and trust the professionals and systems they have developed to withstand whatever may come to pass. At the end of the day, a contested election result is not a given; a decisive result is also not a given but is certainly possible. They key now is to remain focused on what you can control: your emotions, your strategy, and your goals.

Howard Capital Management, Inc. has seen uncertainty come and go. The only things we can say for certain is that the HCM-BuyLine® has been aiming to mitigate downturns for clients since 1997, and we will continue to respect and implement its decisions. Regardless of how events unfold, we must be strategic and tactical to bring our best defense against a market that does not think or feel.