Orion Advisor Solutions hosted a webinar Friday exploring the results of the Nov. 8 U.S. midterm elections, whose still undetermined political balance of power in Congress could impact the portfolios of financial advisors’ clients. The main takeaway is that because neither Republicans nor Democrats can declare political victory, financial markets stand to benefit.
Tim Holland, Chief Investment Officer at Orion, spoke with Steve Pavlick, Partner and Head of Policy at Renaissance Macro Research (RenMac) on everything from which candidates might still win pivotal seats and how President Joe Biden’s administration might respond, to what the political calculus could mean for monetary policy and specific sectors of the economy.
“As we think about the outlook for the markets from an investment team perspective and asset allocation committee perspective, we’ve become more optimistic than not,” Holland said during the webinar, explaining that markets are entering in the seasonally strong period of the year and that 2023 will be Biden’s third presidential year – which historically has been the best year for markets.
“The market is still off about 17% or 18% from its highs and sentiment is still pretty bearish, which historically has been pretty bullish,” Holland said. “As we think about the rest of 2022 and into 2023, between sentiment, seasonality, valuations and the resiliency of the private sector from an earnings perspective for sure, and getting through – even if there’s still votes to be counted – the midterms, we think all those things do point to stocks being higher … six to twelve months out.”
Holland and Pavlick also discussed the potential for the aerospace and defense sector to perform well, fossil fuel investment among asset managers and banks receiving less resistance from a divided Congress than it would from a Democrat-controlled Congress, as well as political gridlock in general historically being good for the S&P 500 since a lack of a supermajority in the Senate or House for either party reduces the chances of major policy shifts next year.
Regarding inflation, interest rates and monetary policy, Holland and Pavlick discussed the possibility that Republicans will be able to impede further fiscal stimulus by the Biden administration and block Biden’s appointment of another Democrat on the Federal Reserve Board, which together could lead to lower inflationary pressures and less hawkishness.
“If we are in a recession next year, knowing that Republicans aren’t going to provide that fiscal stimulus … does that accelerate that shift to either lower rate increases, no rate increases, or actually cutting rates?” Pavlick said during the webinar. “[Fed Chair] Jerome Powell has shown himself to be susceptible to political pressure.”
Hedge Fund Support
These perspectives may shed light on why hedge funds gained in October during the lead-up to the midterm elections, according to data from Hedge Fund Research (HFR). The HFRI 500 Fund Weighted Composite Index increased 2.1%, the HFRI 500 Equity Hedge Index increased 2.87% and the HFRI 500 Event-Driven Index increased 4.1%.
“Hedge funds advanced to begin 4Q, as funds opportunistically navigated both political uncertainties, as well as inflation and interest rate driven volatility, with gains distributed across the universe of both directional and uncorrelated strategies, with leadership from Fundamental Value, Shareholder Activist, Distressed and Special Situations exposures,” HFR President Kenneth J. Heinz said in a report released a day before the midterms occurred.
“Macroeconomic and, more recently, geopolitical uncertainty continues to drive volatility across all asset classes, with the volatility also driving political transition in Europe and likely to impact U.S. elections in the near term. Forward looking institutions are likely to expand allocations to alternatives and specifically hedge funds which have demonstrated their robustness and integral portfolio protection qualities, driving industry growth into 2023,” Heinz said in the report.
Chris Latham, Deputy Managing Editor at Wealth Solutions Report, can be reached at firstname.lastname@example.org