Webinar on the Market Impacts of the US Election

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On the white screen a title appears “Evaluating the Stock Market: Implications of the US Presidential Election” underneath is the name of the presenter Aaron Anderson, senior vice president of Research, Investment Policy Committee Member at Fisher Investments.

Aaron Anderson: Hello, everyone. Thanks for joining us here today. My name is Aaron Anderson and as you can see on the screen in front of you, I'm the senior vice president of research at Fisher Investments and a member of our investment policy committee.

A Man appears on the screen wearing a Navy suit, Sitting in an office. He’s been talking for a while now. His name is Aaron Anderson

Aaron Anderson: I'm sure a number of you are familiar with our firm already, but as you well know, we are a top down, macro focused equity manager. What that means is that we spend a lot of time analysing the macroeconomic environment including the economic backdrop for equities. But, particularly relevant to today's discussion is the political backdrop for equities. And given the fact that here we are on the cusp of a big national election in the US with some, I think, real capital markets implications we thought this might be an opportune time to share our views on the election its potential outcomes, what that might mean for different types of equities and just equities broadly. So, with all that as a backdrop I'm going to jump right into today's presentation. If we go ahead to page two here.

A table appears on the screen that is titled “Presidential Term Anomaly” it is subtitled “Fourth years of Presidents’ terms, which are also election years, have a high frequency of positive returns, But Returns aren’t as strong as third years”

Aaron Anderson: I want to start out by talking a little bit about some historical precedents and what typically happens with equity markets at various stages of the presidential cycle knowing full well, of course, that 2020 is anything but a typical year. But this is a little bit of background on how equities typically react to various stages of the presidential cycle. So, what you've got here are US Equity market returns. We're showing you S&P 500 returns in the first year second year, third year and fourth year of presidential terms. And there are a couple of specific things I want to call out here. Mostly, if you look the bottom summary rows, you'll see the percent of each of these years that's historically been positive.

Aaron Anderson: Keeping in mind this analysis goes all the way back to the 1920s. We've got a very long history of equity market performance here. If you look year by year, I think you notice something very interesting. There's a big difference in how equities perform the front half of president's terms versus the back half of president's terms. So as an example, take a look at that first year. In first years of president's terms S&P 500 has been positive about 58% of the time. That's not particularly great, well below average. Of course, in second years it's closer to 63%. But look what happens when you get into the back half of a president's term as you go from that second year to third year. Suddenly, third years, which are the real sweet spot of the presidential cycle are up over 90% of the time and fourth years and no sludges themselves, they're up well over 80% of the time.

Aaron Anderson: So, what I think is important to focus on here is that transition from a weaker or at least less consistent first half of president's terms to a more consistently positive back half of president's terms. And I think the driving force behind that, or at least one of the driving forces, is what happens in the middle. Of course, that's midterm elections. Every two years we get an election of our entire House of Representatives, a third of the Senate. And usually what that means for any sitting president, doesn't matter what party they're in, is that their party loses power in Congress in those midterm elections. That's just another way of saying you're likely to get more gridlock after those midterm elections than you had before it. What that means for a president is even if they come into office with a clean sweep, if it's a Democrat, they've got a Democratic president and Democrats control the House and the Senate. Chances are you lose some of that power as you go through midterm elections. Same would be true for Republicans. If you want to get something big and controversial done, you're more likely to get it done in those first two years than you are in the second two years because you lose relative power.

 Aaron Anderson: There's more gridlock in the back half of a president's term than there is in the front half of a president's term. That gridlock tends to be a good thing for equity markets. What it means is that legislative risk comes down, you're not going to get the big, controversial things done. You're not going to pass sweeping tax regulation, legislation, regulatory changes. All those things become a lot more difficult. And that gives the market comfort. It makes investors feel like they don't have to worry so much about those big legislative changes disrupting businesses, causing uncertainty and I think that's reflected in the more positive equity market performance you see in those third and fourth years. And really, I think the main point of emphasis here is the importance of that gridlock. Of course, here we are literally today about to start presidential debates.

Aaron Anderson: The presidential election is going to get most of the attention here, but really, you need to think about the entire political spectrum, not just what's happening with the presidency, but what's happening in the House of Representatives, in Congress as well. Because that gridlock type environment, that's one of the key features that helps determine how equities are going to perform. I always think the presidential election probably gets more attention than it ought to because we, as you all know here in the US. Have a number of checks and balances in place that limit president's power. And so, to get anything really big done, you need the approval of Congress. So those elections, I would argue, are on par in terms of performance and their impact on equity markets as the presidential election, which tends to get most of the attention. And we'll revisit that here in just a moment, in today's presentation.

The screen changes into a chart titled “Election years and Equities "then its subtitled “Despite huge volatility, US stocks are about where they often are at this point in an average Presidential election year. If this election year is back loaded as they often are, US stocks should finish 2020 positive.”

Aaron Anderson: Now going on to the next page, number three, I mentioned that fourth years of president's terms, election years, tend to be positive. What I'm showing you here is average S&P 500 returns in those presidential election years. So, this is cumulative returns over the course of the year. That's represented by that yellow or orange line you see there. It's a little bit compressed given the scale, but hopefully what you can get a sense of here is that they tend to be back end loaded, that most of the gains in a presidential election year come later in the year.

Aaron Anderson: And I think the political process feeds into that. And this year has been a great example. Think back not even just the beginning of this year, but going into last year, we literally had dozens of candidates and it was very unclear who will the ultimate nominees were going to be for the Democrats. It was very unclear what policies they were going to champion and so forth. And so again, you just have this greater political uncertainty at the start of the political process, very similar to what we saw in 2016 with the Republicans, where you had many, many candidates and it took a number of months to weed through those candidates to settle in on a nominee.

Aaron Anderson: Then you get into a national election, people of course, adjust their views a bit, adjust their campaign tactics, and then you get into the national election where ultimately you get a winner and you start moving beyond the election. I think that entire process adds more political clarity the farther you get into the year. And that's one of the reasons that election years like this one tend to be more back end loaded, because you get more clarity towards the end of the year than you had at the beginning of the year, which had more uncertainty.

Aaron Anderson: Now you can see I've also overlaid 2020 on top of this. And of course, 2020 has played out in a very different way with all of the volatility tied to COVID-19 and the lockdowns and the economic impacts of all of that. And we've seen somewhat of a V shaped recovery here. But really what I want to emphasize with this chart is where we are now with the market being roughly flat to slightly up for the year, really isn't too far off where you typically are in a presidential election year. It's almost spot on, in fact. And so, in a scenario where maybe COVID 19 isn't going away by any means, but people start to look past that a little bit more, maybe the most fearful periods of COVID-19 are behind us and maybe we're in for a period where US. Elections start to gain more prominence.

Aaron Anderson: You see more headlines, it's more in the news every day, and markets start reacting a bit more to that. It's quite possible that some of those traditional election year impacts of being back in loaded start to come into play more, which could take this flat to mildly positive year that we're in right now into something maybe a little bit more positive by the time 2020 is over.

On the screen, another chart appears, it is titled “Perverse Inverse” then it’s subtitled "US Election can have a big impact on global equities. Investors tend to celebrate Republican Victories in Election years, whereas equities struggle when a new democrat is elected. But those trends usually reverse in inaugural years”

Aaron Anderson: Now, if you go into the next slide, people always ask me, well, what do the different candidates mean for the markets? Is the market going to do better if President Trump wins the election? Is it going to do better if Joe Biden wins? And really, I think it comes a lot more down to the timing of the market reaction than the absolute returns for the market. And here's what I mean by that. If you look at the columns you see there on the far left, what this is showing you is historically how equities have performed in election years where you re-elect Republican versus electing a brand-new Democrat.

Aaron Anderson: So, if you got a Republican whose already president running for re-election and they win, that election year historically has been positive to the tune of about 13% or so. But it's very different when you get a newly elected Democrat. You can see that average returns are actually negative. And I think some of that comes down to the way the market tends to perceive the two parties. Often Republicans are viewed as the more business friendly party. There's this expectation amongst investors that they're going to do more business-friendly things like lower taxes, favor a smaller government, maybe lower regulations and so forth. And I think the market celebrates that by providing better returns in an election year where you get a Republican elected. And sometimes they're more fearful of the Democrat because they fear, oh, this is a party that maybe wants to increase taxes or increase regulations and those types of things that might be less business friendly. Let me be very clear here.

Aaron Anderson: I'm not saying that either party lives up to those expectations. I'm simply saying that this is the way the market tends to perceive them, at least in the short term. And you get a bit more optimism when you've got a Republican that's elected and a bit more pessimism when it's a Democrat that's elected, at least in that election year. But I think what's most interesting about this analysis is really what you see in the middle there is that neither of those parties ever really live up to those expectations. Usually there's a bit of let down the Republican as it becomes clear they're not going to do all the things that people maybe expected them to do. Thus, the inaugural year returns for a Republican tend to be significantly lower than the inaugural returns for a Democrat.

Aaron Anderson: You can see that in an inaugural year for a Democrat, on average, equity market gains have been tremendously positive. And I think that's because some of the fear that built up in an election year, once people come to realize that President's power is limited, as I've mentioned, they're probably not going to do the things that maybe the market was fearful about, that you get a rebound and some relief from those concerns. And that leads to those very positive returns. If you look at the columns on the far right and you just combine the returns in the election and inaugural years and you compare Democrats and Republicans, you can see there's almost no difference whatsoever. I'm always asked, well, what party is better for the market? Is it Democrats, Republicans? I would really say neither, at least around these election year periods. But you can see that there can be a real significant impact on the timing of those returns.

Aaron Anderson: So, as I apply that here to 2000 and 2021, what I'd say is that if this very close election is ultimately won by President Trump, you might expect better returns towards the end of 2020 than if Joe Biden wins. But probably those gains, those relative returns, reverse in the inaugural year. And so maybe this is a stronger year with a Trump victory, but then you'd expect less out of 2021, and the opposite might be true if Joe Biden wins. But ultimately, I think it has a much bigger Impact on the timing of returns than the absolute returns we get over the next 18 months or so.

On the screen a map of the United States appears, it’s titled "Election Analysis: Top Down or Bottom UP?”

It’s showing two maps: one map is showing Electoral College map using presidential Election Results Favors Democrats while the other map is showing Electoral College Map Using State Legislative Election Results Favors Republicans.

Aaron Anderson: Now, if you go to the next slide, I think this is a bit of a unique way to look at elections and forecasting the outcomes, because what we've noticed is that in the media here in the US. There's a very typical way that the media tends to analyse these periods.

Aaron Anderson: Quite often they look at them from what I would call a top-down perspective. When I say top down, all I mean is that there's this tendency in the media to look at how a state has voted for president over the last few election cycles. Extrapolate that into the future, just assume they're going to do that again, and then they assign that state to that particular party, and then they add up all the resulting electoral college votes. And you can see at the top left that's that typical top-down type analysis. And if things do indeed play out that way, that type of analysis is going to favor the Democrats. Of course, you need 270 Electoral College votes to win an election. And if indeed you just got that extrapolation of prior election results, it would give some advantage to the Democrats, as you can see there, and with a lot of swing states in there. And ultimately the election would likely come down to those swing states, which certainly will play a very prominent role in this election as well. But we've tended to take a different view of things because we've noticed some interesting changes to politics over a number of years now where if you look at the lower levels of politics, you look at things at more of a bottom-up level.

Aaron Anderson: What I mean by bottom up is simply looking at local elections, state legislatures and so forth, and we look at the way that those have been trending in recent years. There's been a bit of a difference in that. Many of the state legislatures, in states that previously voted more left, have now been voting more right. So, we asked the question, well, what if states vote not like they have in prior presidential elections, but more like they've recently been voting in their state elections, their local elections? And if they vote that same way for president, what does that mean for the Electoral College? So, you can see that analysis on the bottom right, and there you can see that would tend to get them an advantage to Republicans here.

Aaron Anderson: So, the question becomes, which way are these states going to vote? And that's yet to be determined, of course, and we don't know that with any certainty. But what you're likely to see here in the media is that just extrapolating those views out would tend to give that advantage to Democrats when I think things are a lot more nuanced than you tend to see in some of that type of analysis here.

On the screen a table appears, its titled “How predictive has polling been” the table is then subtitled” Though Joe Biden enjoys a healthy lead in polls, voter preferences can change a lot between July and the election”

The table shows how July polling Compared to popular Vote.

Aaron Anderson: Now, that leads us into polling. So, if we go to the next slide here, you've read, I'm sure, a lot about the fact that Joe Biden is well ahead of President Trump in the polls. And absolutely that's true. But what we wanted to look at was how accurate are polls at around this phase of the presidential race? How much do they swing by the time you get to the actual election? So, we started this out by saying if you take mid-year polling starting in July, and you say, how much does is July polling predictive of actual election results, you can see that there can be some pretty big changes over that several month period. In fact, if you look at the far right, you can see how much polling swung in either direction from where the polling was in July to the actual results in November.

Aaron Anderson: If you look at the bottom right there, you can see that the average swing is about 9% or so, which is right about where Joe Biden's polling advantage is right now. And then you can see some years where you had much bigger swings. For instance, you go back to Dukakis and Bush, where you had a 20 plus percent swing. You've seen that magnitude of swing in either direction numerous times over the years. So, as it pertains to polling, I would say it's probably far too early even today to think the polling is going to tell you too much about the ultimate election outcome. I think it's also important to keep in mind, just given the nature of our political system, that what we saw in 2016, if President Trump were to win re-election here in 2020, he'd probably have to do it in a similar fashion. By that I simply mean his chances of winning the popular vote are very low simply because he's not going to do well in the most populous states, in places like California, in places like New York, that tend to leave heavily Democratic assuredly he's going to lose those votes by a wide margin. And if he can pick up some of the swing states and win them even by a little bit of margin. He can win the Electoral College, but that probably means that if he were to do so once again, he does not win the popular vote.

Aaron Anderson: So, you might even say this polling is a little bit tighter today, just given the effects of the Electoral College system here in the US. Now, I think there are some advantages and disadvantages that each of the nominees have.

On the screen, another table appears, it’s titled "Incumbents’ Advantage” underneath the title a comment is read as “Despite lagging in polls recently, President Trump Carries the incumbent advantage into the election. Incumbents are usually difficult to beat. Past losses have tended to involve weak economies and/ or strong third-party candidates.

The table is showing a history of Incumbent US presidents Running for Re-Election Since 1900.

Aaron Anderson: If you go to page 7, I think one of President Trump's distinct advantages is simply that he's being incumbent. We've got a long history of incumbents running for re-election in this country, and usually they win. So, what you are seeing here is all the Incumbents that have run for re-election and whether they've won or lost their elections. And then you see at the bottom right that of the 20 elections that featured incumbents, incumbents have won about 15 of those.

Aaron Anderson: So, they quite clearly have an advantage here. And in those elections where they didn't win, usually there's some extenuating circumstances, something like a big third-party candidate coming in and eating up a big chunk of the popular vote, like a Ross Perot for instance, years ago. That type of effect can throw off an incumbent's chances and it doesn't look like we're going to have that this time around, of course, but so can the economy in periods where you've had a weirdly weak economic backdrop during an election that certainly isn't particularly good for an incumbent.

And I would argue that that's the environment that we're in right now.

On the screen a new chart appears, the chart is titled “high unemployment historically favors democrats” underneath it Is the comment” Current Economic Conditions could pose a challenge for President Trump’s election chances. Using labour as a proxy, high unemployment tends to favor Democrats.”

The chart is showing Us unemployment Rate percentage across the years 1930 to 2020.

Aaron Anderson: In fact, if you go to the next slide number 8, one of the ways to illustrate that is by using the labour market as a proxy for the overall economy. And so here you see the unemployment rate going back years. We've got recession shaded in there, in the Gray shaded portions.

And the interesting thing here is if you look at when Democrats have been elected historically versus Republicans, what you notice is that those weaker labour market environments tend to favor Democrats and stronger labour market environments tend to favor Republicans.

 Aaron Anderson: So, if you think about it, that is a proxy for the overall economy. It's just a different way of saying that Democrats usually get elected or have a better chance of getting elected in weaker economic environments and Republicans in stronger ones. And so, we hear we are in an environment that it's hard to describe as anything but weak. I think the reasons for that weakness are much different than you see historically. We didn't come into this period with great excesses, excessive amounts of debt or a financial crisis or a housing bust that was looming, any of those things. Clearly the weak economic environment that we're in right now and the resulting high unemployment rate is very much COVID-19 induced.

Aaron Anderson: And so, there is certainly a question here. Will investors and voters react to this period in the same way they have historically? That's yet to be seen. But I think certainly a weak economic environment in a period that's been overseen by an incumbent, probably that's a negative for their chances of getting re-elected. So, there's some positives and negatives in there for both of the candidates, which I think all just adds up to the fact that this is likely to be a very close election and it should be a very exciting election night here in the US. And probably even beyond that, I should mention, I think there's also a high likelihood that maybe this election isn't resolved until some meaningful period after the actual election due to write in voters and write in votes and lots of legal challenges and so forth. But we will ultimately get a result. We will ultimately have a winner here, and we will ultimately get a new president or the existing President reinaugurated at some point in early 2021.

On the screen, a table appears, its titled “Few Vulnerable Senate Seats”

Underneath it is the comment” Us Senate seats in which a candidate from one party in running in a state that frequently votes for the opposite party are vulnerable. The table below shows senate seats up for election in 2020 with the states sorted by how they voted for president Tump in 2016. There are few such vulnerable candidates in this year’s election, meaning a huge swing in either direction is unlikely.”

Aaron Anderson: Now, if you go to the next slide number 9, this speaks to the makeup of Congress I mentioned before some of the checks and balances that are in place. Congress, of course, is a very key part of that because as I said before, to get controversial legislation passed, you need to have the approval of Congress generally.

There are some things, of course, the President can do on their own related to trade, related to other issues, and President Trump has pulled a lot of those levers, of course, with a fair amount of controversy.

Aaron Anderson: But the big stuff, the tax changes, the big regulatory changes and so forth, really, that needs to make its way through Congress. And so, as we analyse potential outcomes for the congressional elections this year, I think one of the better ways to do that is by looking at the Senate. So, what we've got here are all the Senate seats that are up for re-election this year. We've got the Republicans in red and we've got the Democrats in blue, and then we've got them sorted by how each of these states voted for President Trump in 2016. And what we're really looking for here are mismatched seats.

Aaron Anderson: Are we seeing Democrats running in right leaning states? Are we seeing Republicans running in left leaning states? And what you'll probably notice first off, is there just aren't a tremendous number of examples of that. You've got a few, like, for instance, Doug Jones, who is in Alabama, who won in the special election a while back. Alabama, of course, tends to be very much a right leaning state. Doug Jones won as a Democrat, but he's going to face a very tough re-election this year. So maybe that's a seat that the Republicans can pick up. But then you've got other examples on the other side of the aisle. You've got Susan Collins in Maine; you've got Corey Gardner in Colorado that are Republicans running in slightly left leaning states. And so, these are all some of the more vulnerable seats, in addition to some of the ones that are right in the middle there, like McSally or Peters or some of the states that really are true swing states.

Aaron Anderson: But there aren't enough of those mismatched senators where you say that one party or another is highly vulnerable. And so, no matter the outcome this year, even if you get a sweep in either direction, meaning Democrats win the presidency, maintain the House of Representatives, and take the Senate, they're probably going to do that if they're able to by a thin margin. And if things go the other way, Republicans win all those positions, well, they probably have a relatively thin margin as well. That means we're likely to see some form of gridlock coming out of the election almost no matter what. And of course, there's also a good possibility that you don't get a clean sweep in either direction and remain the same type of gridlock we've seen since our last midterm elections.

Aaron Anderson: I would view that as overall a positive outcome for the market because again, even though it can be frustrating to people politically, those political risks are lower, and the market finds more comfort with that traditionally. Now, I know for a lot of folks on the call today, the direction of equities matters a lot, of course, but you're probably not making extremely active tactical decisions in portfolios to shift around in a period like this. And so that begs the question, well, what types of equities tend to do better or worse given different political outcomes?

On the screen a new chart appears, the chart is titled “Health Care Relative Performance”

The chart is showing how health care and s&p500 perform months before and after election.

The republican red line in the chart is outperforming the blue democrat line.

Aaron Anderson: So, if you go to page 10, this is just one example of a sector that tends to be heavily influenced by elections generally, but also by which party wins elections.

Here we're looking at the relative performance of the healthcare sector. And I think healthcare is one of the more affected sectors usually because as part of political campaigns, very often there's talk about drug pricing and healthcare services and how do we bring costs down.

Aaron Anderson: And there's some very different approaches that the different parties take to all of that. And so, the way to look at this is when these lines are declining, that's healthcare underperforming. This is the healthcare sector divided by the broad water index. And then when the lines are rising, that's healthcare outperforming. And we're doing that in either Republican or Democrat regimes here. And so, what you see is in periods where either a Democrat or a Republican win's election in the 18 months leading up to the election itself, that tends to be a relatively weak period for healthcare because that's a big campaign issue and that gets people worried about some of the potential changes that might be coming.

Aaron Anderson: Now, things have been a little bit different this time around, of course, because of COVID-19 because many are looking to the healthcare sector, drug companies in particular, to provide solutions to this problem. It's not an environment that's ripe for really focusing too much in on the healthcare sector and being very punitive towards it. But certainly, the historical precedent is that healthcare is one of those sectors that tends to struggle leading into election, but based on the election results, it does much better afterwards.

Aaron Anderson: But you can see here that the recovery for healthcare is much quicker and stronger traditionally when a Republican gets elected versus a Democrat. Because I think generally the view is that they probably won't enact some of the things that people were more fearful about versus bigger changes that might be expected if indeed a Democrat were to win. Again, I'm not saying that either party lives up to those expectations, but that the general perception.

On the screen new 2 charts appear, the title is “Health care Relative Performance”

The first chart is about warren or sanders Dem nomination Odds, while the second chart is a health care/MSCI world total return.

Aaron Anderson: In fact, you've seen this same type of an effect in this election. If you go to the next slide, number 11, what you see is that there's been a real significant influence on the healthcare sector based on which candidates the market thinks might win. And so, what we're showing you on the top chart is based on online betting odds. And polling the odds that either Elizabeth Warren or Bernie Sanders were going to get the democratic nomination this year again, versus the relative performance of the healthcare sector you see at the bottom. And you can really get a sense of that inverse relationship here, and why I think this has been so true in this election cycle for these particular candidates is these are simply the ones that had healthcare reform, more extreme healthcare reform, like single pair healthcare and so forth. This was really one of their primary campaign issues.

Aaron Anderson: And so, in these periods where either Elizabeth Warren or Bernie Sanders, who both at various points in this election cycle had been leading candidates for the Democratic nomination, you can see how healthcare has tend to do better when their odds are declining and tends to do worse when their odds have been increasing. Now, I think as we look forward from here, though, of course, neither Elizabeth Warren nor Bernie Sanders won the nomination. It was Joe Biden. And I would say that his views about healthcare certainly aren't perceived as negatively for the healthcare sector, as Elizabeth Warren or Bernie Sanders not commenting at all on whether or not they're good or bad for the country, I mean, specifically for the healthcare sector.

Aaron Anderson: I think now the market is likely to focus on other things. And in fact, within our research group, we have tried to identify the categories of equities that we think will be helped or hurt by either Joe Biden or President Trump winning re-election.

On the screen, a new 2 chart appears, the title of the charts is “Trump/Biden Winners vs. Election ODDS”

The first chart is about Biden” Winner” VS. Election ODDs, its showing Biden Basket / World IMI return over the time of his office time.

The second chart is showing Trump “Winners” VS. Re-Election Odds.

Aaron Anderson: And so, if you look at page 12 here now, this is not based on our assumptions about what will be helped or hurt. This is simply based on what industries in the market have done well when it looks like Joe Biden's odds of winning are increasing, and which have done better when it looks like Donald Trump might win re-election.

Aaron Anderson: So again, the lines that you see here in terms of election probabilities are based on online betting and so forth. And there are a few distinct categories that seem to do better when Joe Biden's odds are improving. That would be high tariff areas like agriculture, or certain manufacturers like motorcycle producers, where some of the trade tensions we've seen in recent years have been particularly impactful for those industries. And I think there's a view that if Joe Biden were to win the election, that maybe some of those trade tensions would diminish and some of those harder hit areas in the market might do better with a more favorable trade environment.

Aaron Anderson: Another category that's done well as Joe Biden's odds have increased is housing. He's been a proponent of increased construction, more affordable housing, and so forth.

So, housing related companies have done well. And the last category is alternative energies, things like solar, alternative fuels. They've done quite well as he's proposed various forms of a green New Deal and so forth. On the bottom there. The areas that have tended to do better when it looks like President Trump's re-election odds are improving are some of the more reopening plays.

Aaron Anderson: The areas that have been particularly hard hit throughout COVID that it might have better prospects should the economy open up sooner. So that would be things like restaurants and cruise ships and airlines and so forth, those seem to be the parts of the market that have reacted most strongly to improved odds of a Trump re-election here. Now, will those be more long lasting or will they'll be fleeting? My guess is that these are going to tend to be more short term in nature because I think some of those things that the candidates might want to affect something like a Green New Deal or a quicker opening up of the economy, I think some of that is out of their hands, tied to gridlock and so forth. But at least that's been the effects in the most impacted areas so far.

A white screen appears with a title” KEY TAKEWAYS” it is followed by 4 points, that are read as:

“We believe a new bull market began in late March, though Uncertainty and Volatility likely Continue”, “The equity Market Rally so Far Suggests Investors are Looking Past Ugly Near-Term economic Date To a brighter Future”, “The Market Downturn and Rebound is acting similar to a huge Correction rather than a typical bear market”, “Market conditions Continue to Favor Large, high-Quality, Growth Companies over smaller, cyclical, Value Companies, But we are on the lookout for a potential style shift”.

Aaron Anderson: Now, if we go ahead to the next page, number 13, this just sums up some of our views of the overall market. First, I would simply say that we do think we're in a new bull market now, but that's as much a technical term as anything else. When I say that we're in a new bull market, I simply mean that we think the lows of this market cycle are behind us. That if you go back to February and March of this year and you just think about the uncertainty, this brand-new epidemic that turned into a pandemic, huge institutional responses of it that locked down big parts of the economy. Some of that was very much unprecedented and came on us so quickly that I think it started a tremendous amount of uncertainty that led to the tremendous amount of volatility that we had earlier this year.

Aaron Anderson: And I certainly don't mean to say that now we're in a renewable market, it's a straight line up from here, but I think matching those levels of uncertainty would be very difficult. Even if we did get another wave of the virus, even if we did get some renewed lockdowns and so forth, investors have simply had more time to digest all of that, for better or worse, to feel a little bit more comfortable with it. So, I don't think you get the same market reaction next time around as you got initially. So, I think we are in a new bull market here, but there's undoubtedly going to be some continued uncertainty and volatility as this bull market moves forward. Now, what a lot of people ask is how can we be in a new bull market if economic doubt is still so lousy? And indeed, it is. And I think the assumption by many is that that's due to monetary policy, that's due to fiscal policy propping up the market and maybe those effects are likely to be fleeting, but I really don't think that's the case at all. I think what the market is doing now is playing the role it usually does of starting to discount future economic conditions as we start to look a year out from here, two years out from here. I do think that there's a brighter economic future ahead. I think we are moving towards economic normalization with fits and starts and I think the market is starting a bit to look past COVID and see that brighter future at some point in the not-too-distant future.

Aaron Anderson: Now, I will hedge that a little bit by saying the market isn't treating all different categories equally of equities. If you look at just headline indexes like the MSCI World Index, the S&P 500, you see that they mostly recovered their losses from earlier in the year. Some, like the SP, are on to new highs, but that doesn't mean all the categories that comprise the indexes are doing the same thing. In fact, this has been a year where the spreads and sector performance have been some of the biggest, we've ever seen at any point in history.

Aaron Anderson: And I think that's the mark at figuring out what types of companies have the business models that can weather the storm of 2020 and which might be more challenged. The areas that are doing best are areas like the technology sector, the consumer discretionary sector, the areas that are struggling are areas like financial stocks and energy stocks, and the spreads between those are huge. So, it isn't just as if there's a wave of liquidity that's pushing up all risk assets. The market is actually being fairly discerning here in terms of what they think will do better and what we think they'll do worst.

Aaron Anderson: Now, I think an important distinction this year, even though technically we've been through a bear market this year, certainly the drop we had was of bear market magnitude. In many ways it's acting a lot more like a big correction than a traditional bear market. I mentioned already that this economic contraction, this recession, was very abnormal. It was brought on by all the efforts to contain COVID-19, but I think the market reaction has been very unusual and abnormal as well. Usually what you see as you come through a market cycle is you get a bear market as you start a new bull market. Usually, it's the small cyclical companies that do best with a huge frequency. Those small cyclical companies outperform in the early stages of a new bull market cycle. But we haven't seen that this time around.

Aaron Anderson: In fact, style leadership has been fairly consistent. Leading up to COVID-19, bigger, higher quality growth companies were doing well through the downturn, they held up better and, in the recovery, as well. They've been outperforming. In that way, this period is acting a lot more like a correction than it is a traditional bear market. In fact, I think in some ways you can think of the period we're in right now as just being an extension of the prior bull market, just with a giant correction in the midst of that.

Aaron Anderson: And so that means stylistically is we still see a more favorable environment for those big high quality growth companies to continue outperforming. I think investor preference certainly remains with those types of companies and is likely to for the foreseeable future. I think the fundamental environment favors them as well. As we look past some of the volatility associated with COVID-19, and as we settle into an economic environment that's slow but steady growth with low interest rates and low inflation, I think all of that tends to favor the more growth-oriented companies, much more so than the cyclical value-oriented ones. But that's not going to be a permanent leadership.

Aaron Anderson: I think that they can continue to outperform for some time here in the near future, but things will shift at some point in the not-too-distant future most likely. And so, I think having flexibility here is key. I see investors all the time who are terrified not to own the fangs and the big tech companies because they've contributed so much to outperformance here over the last year plus. But I also see investors who are horrified and terrified to invest in those companies because they worry that there's a change that's coming around the corner and there will be a change in leadership here at some point. We just don't think that time is right now. But it's important to have the flexibility to emphasize whatever types of equities you think are going to do best at any given time.

Aaron Anderson: So, an important part of our management style is not to be married to any particular type of equity permanently, to have the flexibility to shift towards whichever types of stocks we think are going to do best ahead of us right now. We think that environment continues to favor those large, high quality growth companies. But certainly, we're on the lookout for changing conditions that might cause a change in leadership and we want to stand ready to make portfolio changes to take advantage of that if and when we might see that coming.

Aaron Anderson appears on screen talking in his office.

Aaron Anderson: So, we've gone just a couple of minutes past our time here. I'm going to wrap things up there. I just want to once again say thank you so much for taking the time and participating today. If you've got any questions about the presentation, anything else, just reach out to your Fisher Investments representative. We're happy to answer those questions to share our research if there's, anything we can be doing for you, please just let us know. And thanks again for being with us today. It's very much appreciated. Have a good rest of your day.

Aaron Anderson finished talking, and A Series of Disclosers appears on the screen:” “FIRM” as a title followed by the actual disclosure "Fisher Investment (FI) is an investment adviser registered with the securities and exchange commission as of June 30.2020, FI managed over $122 Billion, including assets sub-managed for its wholly-owned Subsidiaries maintain four principal business units – fisher investments institutional group (FIIG), Fisher investments Private Client Groupe (FIPCG), Fisher investments international (FII), and fisher investment (401(k) solutions). There groups serve a global client base of diverse investors including corporations, public and multi-employer pension funds, foundations and endowments, insurance companies, healthcare organizations, governments and high-net- worth individuals, FI’s Investment Policy Committee (IPC) is responsible for investment decisions for all investment strategies.....

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