As investors consider the political ramifications of the upcoming presidential election, exchange traded fund investors should be prepared for what the market implications may be of either outcome and what that could mean for investment portfolios.
In the recent webcast, An Election Playbook for Client Portfolios, Liz Young, Director of Market Strategy, BNY Mellon Investment Management; Chris Lucas, Director of Global Government Affairs, BNY Mellon; David Vandivier, Director of Global Government Affairs, BNY Mellon; and Stephanie M. Pierce, CEO of ETF, Index and Cash Investment Strategies, BNY Mellon Investment Management, warned that the coronavirus pandemic is far from over and remains a top risk in today’s market environment. While widespread lockdowns are unlikely, negative news updates will continue through the end of fall. Furthermore, BNY Mellon anticipated that expectations of an opposing party win could continue to cause market weakness ahead.
Overall, BNY Mellon argued that investors should not bet against the recovery process. The rebound won’t be easy but it also won’t likely be derailed, so investors shouldn’t worry about a double-dip recession. The closely watched coronavirus economic stimulus package, though, will remain a catalyst for short-term market volatility since there is no definitive plan or date of implementation in place.
Looking at the mid- and long-term outlook, BNY Mellon pointed to a handful of positive factors that will support the markets ahead. For example, household finances look strong, housing data has surprisingly surpassed estimates, manufacturing data is strengthening, business confidence is recovering, and while Covid-19 case numbers are rising, activity levels are staying steady. The strategists also highlighted the rebound in economic activity, like industrial production and Manufacturing PMIs, that indicate we are in a “V-shaped” recovery.
To round out the economic recovery, the strategists underscored some factors they are hoping to see, such as a rise in consumer confidence, high income household spending, lower savings rates and a viable vaccine.
According to BNY Mellon, there is a 40% chance that the trough is behind us and risk assets will continue to gain, with the health situation management, and supportive fiscal and monetary policies. On the other hand, there is still a 30% probability of the situation making a turn for the worse with a resurgence in Covid-19, an ineffective vaccine, widespread risk-off selling and another market bottom in 2021 before recovering to previous GDP levels by 2022. There is also a 20% chance we see a strong U.S. economic recovery, a strong U.S. dollar and the U.S. outperforming other global markets with a quick bounce in inflation, followed by the Federal Reserve hiking interest rates. Lastly, the strategists warned of a 10% chance for a prolonged bear market, coupled with rising inflation and a permanent hit to economic growth.
The strategists believed that the markets may continue to have legs, especially with cash on the sidelines at an all-time high. According to money market fund asset data, retail investors are still sitting on cash hoards not seen since the 2008 financial crisis, and institutional investors are holding on to close to $3 trillion, compared to the $2.5 trillion at the height of the financial downturn. Consequently, once the dust settles, a lot of money will eventually find its way back into risk assets.
ETF investors interested in bolstering their core investment portfolio have a number of options to choose from, including the BNY Mellon US Large Cap Core Equity ETF (BKLC), BNY Mellon US Mid Cap Core Equity ETF (BKMC), BNY Mellon US Small Cap Core Equity ETF (BKSE), BNY Mellon International Equity ETF (BKIE), BNY Mellon Emerging Markets Equity ETF (BKEM), BNY Mellon Core Bond ETF (BKAG), BNY Mellon Short Duration Corporate Bond ETF (BKSB), and BNY Mellon High Yield Beta ETF (BKHY). The suite of BNY Mellon ETFs are some of the cheapest core investment portfolio options available, offering the most competitive costs in the ETF industry, with both BKLC and BKAG showing a 0.0% expense ratio or no annual fees. The other ETFs come with expense ratios ranging from 0.4% to 0.22%.
Financial advisors who are interested in learning more about how the elections can affect an investment portfolio can watch the webcast here on demand.