November 6, 2020
Review the latest portfolio strategy commentary from Mike Gibbs, managing director of Equity Portfolio & Technical Strategy.
The election outcome still hangs in the balance- VP Biden is close to 270 electoral votes, while President Trump still has a path to victory but more of an uphill battle at this point. The Senate majority is also still undecided and it is possible that Georgia has two runoffs for Senate positions that may not be known until January. Republicans are favored to win at least one of the seats (which would maintain a Senate majority), but until the outcome is known there still remains some lingering uncertainty. Also, Democrats will maintain their House majority, albeit much thinner than previously anticipated.
Our base case is for divided government at this point, which provides more continuity of the current environment rather than the potential for wide-sweeping changes. We view this is as a net positive for equity markets, particularly in this scenario given it puts the odds of higher taxes very low in the years to come. In the near term, investor focus is likely to shift back toward fiscal stimulus and Covid. The likelihood of divided government, and potential for contested results, dampens the size and timing of additional aid. However, we do believe it comes at some point and are encouraged by the change in tone of Mitch McConnell yesterday that he wants a fiscal package by year end. Also the virus spread continues to intensify and remains a headwind. While this can influence market volatility, our expectation of positive news flow on therapeutics and a potential vaccine by year end remains.
The S&P 500, after finding technical support in the low 3200s last week, has surged higher by over 7% in just the past four days. The sharp move has taken the index up to an area of technical resistance in the 3500s. We view the first level of technical resistance at today's high of 3529 (downtrend line of the September and October highs), followed by horizontal resistance at 3550 and 3588. While we remain positive over the intermediate term outlook and believe the likelihood of divided government reduces the chances of a bear case scenario playing out, we would refrain from unbridled enthusiasm at current levels. In the short term, the S&P 500 has run up sharply to an area that could create a slow down or pause in the past week's ascent. That said, we see multiple levels of support nearby and would continue to use weakness (both for the market or within favored sectors and stocks) as a buying opportunity for the long term.
At the sector level, the elevated odds of split government favor continuity of sectors operating best in the current stay-at-home environment in our view. We continue to recommend overweight exposures to Technology, Health Care, Communication Services, and Consumer Discretionary. We also stick with the Large Caps over Small Caps for now, and continue to favor Growth over Value.
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