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Investment Strategies for the 2020 Elections: Three Areas to Watch

Upcoming elections may have investors wondering what's next. Here, the head of Global Market Strategy for Wells Fargo Investment Institute shares his thoughts on how to prepare.

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Election Day is coming—and we’re increasingly interested in potential changes that could result. Paul Christopher, CFA, head of Global Market Strategy at Wells Fargo Investment Institute, has watched markets around the world respond to different election outcomes. The U.S. general election scheduled for Nov. 3, 2020, is a study of opposite forces: As of August, the S&P 500 Index had largely recovered to pre-pandemic levels, but the impact of election outcomes on the economy are still unknown.

Christopher describes what investors should consider as the election date nears.

Expect a level of uncertainty before and after the elections

The possibility of change can lead to uncertainty, and that’s especially so in 2020 due to major economic events that are still evolving:

  • Continued business disruption caused by the coronavirus pandemic, particularly small and midsize businesses not listed on the S&P 500
  • The pandemic’s continuing impact on the global economy
  • Ongoing turbulence in the U.S.-China trade dispute
  • A gradual recovery from the 2020 economic recession, complicated by uncertainties about the pace of COVID-19 infections during the cold-weather months
  • Increasing geopolitical tensions in the Middle East and much of Asia

How should investors respond? For now, Christopher advises staying the course with their investment plans. “It’s always wise for investors to meet with legal, tax, and investment advisors ahead of elections to prepare for possible tax law changes. As for financial markets, we believe it’s unwise to presume which campaign promises today will turn into new laws next year—especially now. Real change takes time to unfold. But there are portfolio steps that investors can take now. The pandemic already has produced political and economic changes that we believe the winners of the November election will be unable to ignore. Our current guidance looks for opportunities resulting from those changes.”

Adjust how you look at risk 

Before the pandemic, investors had already started taking a more conservative approach because of the economic slowdown. That’s still appropriate, but Christopher suggests investors may also want to adjust the type of risk they embrace.

“We’re advising investors to remove risk from some parts of the portfolio and add it elsewhere,” Christopher says. “For example, that might mean focusing more on large U.S.-based companies that are oriented toward growth, because we see the U.S. economy recovering in 2021. We also have seen several industries, such as e-commerce and online streaming, do very well, and we expect they will continue to do well during the recovery we anticipate and, in our view, into the years to come.”

Weigh private debt carefully

Private debt can be appealing, especially for qualified high-net-worth investors with a long time horizon and lower liquidity needs. But investors should approach debt with greater caution.

“The credit space appears attractive, but it’s important that investors do the due diligence to help ensure that the business can survive not only 2020 but the aftermath of the recession, which could last months or years, especially if the pandemic continues,” says Christopher.

The Wells Fargo Investment Institute believes that it will take a long time—well into 2022—for consumer spending to return to pre-pandemic levels, and some companies, including small businesses or those that rely on consumer spending, may not survive even with government aid.

Diversify in new ways

“The slow economic recovery that we expect may tempt investors to hold cash as a defensive measure,” says Christopher. But he recommends against loading up on cash or on any particular asset class. “Instead, in our view, investors should invest today based on our guidance around the dominant economic themes. After the elections—and even after the new year—will be a time to consider diversifying into potential opportunities that new federal policies may create.”

“Federal spending and corporate tax policies are ongoing areas of uncertainty but should resolve as the new Congress sets its legislative priorities and while congressional leaders learn how to work within the balance of power,” he says. “That said, we believe that any increase in, for example, corporate and personal income taxes would be offset by spending, possibly in the areas of infrastructure, health care, and public initiatives to address socioeconomic disparities. We believe there will be investment opportunities next year, but the purpose of waiting is to discover how Congress prioritizes and compromises on its spending goals.”

Colleen Marble is a freelance writer based in St. Louis, Mo.

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

Opinions represent WFII’s opinion as of the date of this article 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. WFII does not undertake to advise you of any change in its opinions or the information contained in this article. Wells Fargo & Company affiliates may issue reports or have opinions that are inconsistent with, and reach different conclusions from, this article.

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 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.

Forecasts and targets are based on certain assumptions and on views of market and economic conditions which are subject to change.

Past performance is not indicative of future results, and there is no assurance that any investment strategy will be successful. All investing involves risk, including the possible loss of principal.

Asset allocation and diversification are investment methods used to help manage risk. They do not guarantee investment returns or eliminate risk of loss including in a declining market.

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