Elections and Markets: A Q&A with Northwestern Mutual Portfolio Managers

It’s been a rollercoaster of a year for investors, and with a presidential election around the corner there could be a few more bends left in the track. The election season is always an emotionally charged and uncertain time, and it’s natural to wonder how a Donald Trump or Joe Biden administration might impact markets and your savings. Jeff Nelson and Matthew Stucky, portfolio managers with the Northwestern Mutual Wealth Management Company, spend most of their days thinking about just that. They oversee a $1.3 billion equity portfolio that’s beaten the S&P 500 three years in a row and is ahead of the index by more than 400 basis points through Q3 of 2020.

They both sat down for an interview to share their expectations for markets heading into the election.

First off, what do you say to investors who are contemplating changes to their portfolios based on an election outcome tipping one way or another?

Jeff: Don’t overreact to election expectations or outcomes, because, historically, the market’s knee-jerk reactions fade. Over time, market returns, on average, have been positive under both Democrat and Republican presidencies. We even crunched the numbers on that and found that someone who remained fully invested under both parties holds a significant total return advantage over a hypothetical investor who only remained invested during a Democrat or Republican presidency. 

Matt: Our process identifies high-quality companies with durable business advantages, which means they tend to do well regardless of who is president. That approach served us well when markets declined in spring. We saw that these higher-quality companies can withstand volatility and can even further press their competitors and gain share in hard times. 

That means our holdings aren’t going to change based on a pending election. Sure, there are risks and uncertainties that come with any political restructuring, but we’re committed to our process and a longer-term investment time horizon, and we will only make changes if something significantly alters our outlook.

With that said, the president still has the power to enact policies that could impact certain sectors or industries. How do you factor those “political restructuring” risks into your thinking?

Matt: Well, policies aren’t always so cut and dry. President Trump’s election in 2016, from a policy perspective, was thought to be a major positive for financials and the energy sector. But if we’re looking at the scoreboard here four years later, those have been the worst-performing sectors under his tenure.

Often, it seems the status quo holds even if an administration implements sweeping reforms to industries. Health care, for example, did fine under President Barack Obama. The big banks were in the regulatory crosshairs after the Great Recession, but that didn’t stop the them from grabbing market share in terms of deposits in the years that followed.

You have noted, however, that a Democratic sweep would likely be a disruptive outcome?

Matt: A sweep is always disruptive, whether it’s Democrats or Republicans taking power, because it introduces uncertainty to what the existing policy has been for the past four years. It can accelerate the timeline for partisan reforms, because there isn’t that push and pull for negotiations and compromise between parties that slows passage of legislation. And in this election, if there’s a Democratic sweep, there is potential for a change to the existing tax system. However, we don’t know what the timeline would be for those reforms.

Jeff: We’re coming out of a recession and growth is improving, so I’m not sure how aggressive a Democrat-controlled government would want to get with tax increases and other regulatory headwinds. Keep in mind, a Democratic sweep would likely mean a larger stimulus package and more money in consumers’ pockets. That’s why we don’t alter our portfolio or investment thesis because of an election. There’s never pure upside or downside with any outcome, because reality is always more complex.

Health care is once again top of mind for Americans during this election and has been a target for politicians in the past. What are your thoughts on the sector?  

Jeff: Our portfolio is currently underweight biotech and pharma, but we are overweight managed care, equipment and life sciences industries, which we believe to be advantageous during this election cycle.

Drug pricing reform is often the most direct route to reduce health care costs for Americans, so it’s often a focal point for both parties’ political agendas. But we think the rhetoric may soften given what those companies are doing right now to solve a pandemic. Nonetheless, as pandemic fears fade in the years ahead, we see potential for drug price reform returning to the key areas of risk for the industry. 

Does “Medicare for All” factor into your health care thesis?

Jeff: Such a reform would shift the whole dynamic of the health care coverage industry, making the private insurer model obsolete, and that’s an inherent risk to the industry. However, we believe the probability of successfully passing such legislation is very low given how difficult it is to transform an entire health system. Further, Vice President Biden has openly rejected the “Medicare For All” model, and instead looks to be favoring an expansion of Medicare and Medicaid.

Let’s turn to technology and communications. How are you positioned here going into the election, especially with antitrust talks ramping up?

Matt: Whoever is elected will likely continue pushing forward with antitrust investigations of Facebook, Alphabet and Amazon. But this will all move through the legal system at a pace that extends further than either Trump or Biden’s term. If we look at some of the past actions against IBM and Microsoft, they took a decade to resolve. Antitrust will likely be debated for the next two or three administrations. Ultimately, we don’t think this results in a break-up of big tech, but fines and changes to business practices are likely.

We are still positive on the sector and have an overweight in semis, software and internet media. Even with a challenging regulatory environment on the horizon, our conviction on big tech remains high as we think secular tailwinds will persist.

We’re seeing a solid recovery in economic data. Does that bode well for industrials post-election?

Jeff: Again, our view on the sector is colored by a Democratic sweep. Democratic agendas tend to lean toward less defense spending, yet the U.S. has continued to be a defense-driven country. Given the long-term strength of the industry, we likely would not make any changes to our defense exposure.

Defense companies will likely be volatile over the next couple of quarters, potentially giving us an opportunity to invest in one of these high-quality franchises. Because we stick to a strategy that emphasizes quality companies and diversification, when the market overreacts, we are typically in position to take advantage by picking up companies that have screened well for us or adding to our holdings.

Matt: Biden's stated policies could lead to cost increases for many industrial companies, especially for companies with high labor costs. In addition to higher wage costs, there could be some disruption in supply chains for equipment and machinery manufacturers, as well as increased regulatory costs. But, again, we will only make changes if something significantly alters our outlook.

And, lastly, financials.  They’ve underperformed in 2020, so how are you positioned in this sector heading into November?

Matt: While the financial sector is clearly one of the more discussed sectors when it comes to the election, we don’t foresee making many changes to what we currently own. We are overweight exchange platforms, capital markets and property and casualty insurers, while largely neutral on the banks. 


Commentary is written to give you an overview of recent market and economic conditions, but it is only our opinion at a point in time and shouldn’t be used as a source to make investment decisions or to try to predict future market performance. Please speak to your financial professional to discuss your individual circumstances. There are a number of risks with investing in the market; if you want to learn more about them and other investment related terminology and disclosures click here.


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