Why investors must wait for election clarity

Markets will head top-right again once this political duel is behind us, says portfolio manager

Why investors must wait for election clarity

Like many of us, advisor Chad Larson has been glued to the TV – and still might be by the time you read this - soaking up the coverage of the U.S. election, which quickly made a mockery of predictions of a blue wave.

It is, however, tight and contested. The portfolio manager and SVP at MLD Wealth Management Group, Canaccord Genuity Wealth Management, told WP that while markets don’t like uncertainty, they had “made peace” with the prospect of post-election litigation. The main concern was whether civil unrest would derail the process and provide a Black Swan event. Thankfully, that has not been the case so far.

Larson believes that investors should resist trading around the 0.1% chance of a result being overturned in the court room and wait for clarity. Then it’s a case of being nimble and recognising sector opportunities.

He said: “You’re going to see this dragged out for another couple of days. But regardless, after this, markets are just going to go top right again from a synchronized global recovery from the pandemic, an ever-accommodating Fed, and sentiment.

“Once the election is behind us, and there is a clear winner, depending on if we have a blue or red president, certain sectors are going to do better under various scenarios. Those are things you can position for, trade around and get comfortable with. The world doesn't end with one president, whether it switches blue or stays red.”

The Calgary-based portfolio manager said the prospect of litigation is real – Trump filed a lawsuit to halt counting in Michigan as we spoke – and that with mail-in ballots favouring Democrat Joe Biden 3 to 1, President Donald Trump would be remiss not to litigate that.

He joked that U.S. elections are like watching Wrestle Mania but that the most powerful entity in Washington D.C. remains the Fed. And while the “Make America Great Again” movement drove the S&P higher, the pandemic meant there are now only a few winners and many more losers. Investors’ should be ready to reposition, depending on who eventually claims the White House.

“If you strip out certain sectors - materials, healthcare and tech – the general market is challenged," Larson said. "But we don't know what the game plan is. Whether it’s Democratic or Republican will shift client portfolios for the coming year, whether it be infrastructure, clean tech or energy.

“You’ve got to be very cautious. If you get a Democratic government, fracking is going away and that's going to hurt some companies or vice versa. They're going to be very constructive to infrastructure and will reflate the economy via digging roads up. But it’s too early to tell, so head up and be ready.”

Larson went into the election with elevated weights of cash, aim to protect capital and wait for opportunities to present themselves. While he doesn’t foresee massive pockets of volatility, he and his team moved into this intense political period on the back of a COVID-19 performance he said will be a “feather in my cap for my career”.

He and his partners acted on their views of the economy in late December and early January. Then everything they thought might happen was “super-sized and lit with dynamite” by the pandemic. With the experience of 2008-09 fresh in their minds, MLD was well-positioned to take advantage.

Larson explained: “Going into the crash, we had elevated weights of cash. And while in late December, volatility was incredibly low, we had incredible profits built into some of our larger positions like Microsoft, Amazon and Google. We were able to very simply buy very cheap put options as insurance in case there was a market event or tax harvesting, so that really dampened our drawdown.

“But what paid off was the experience and the conviction that when things really washed out in the markets and dropped over 38%, we had the belief to be an aggressive buyer through the dip and all the way out.”

The biggest lesson learned from 2008-09, he added, was that while clients understood why markets crashed and they lost money, they would not accept the fact that they didn't make it back.

“People are inherently greedier than they are fearful in the upswing, and so we got very aggressive at the bottom and our clients gave us the discretion and trust to be able to do that.”

Chad Larson is a Portfolio Manager and SVP at MLD Wealth Management Group at Canaccord Genuity Wealth Management. His views, including any recommendations, expressed in this article are his own only, and are not necessarily those of Canaccord Genuity Corp.