Political Volatility Ahead

by Stephen Dover of Franklin Templeton Investments, 8/17/20

Our Head of Equities Stephen Dover explains why he thinks possible changes to the US political landscape could lead to further bouts of market volatility.

The 2020 US presidential and congressional elections are fast approaching, and since we are now on COVID-19 time, we are likely to find more policy and political turbulence through Inauguration Day than we have faced in past elections. After the election results are clear, there is a high possibility that there will be more legislative changes than we have historically experienced, especially if there is a “blue wave.”1

Election uncertainty will likely lead toward more market volatility and the need to think about political considerations when navigating your investments. “Even if we can identify an unchanging handful of investing principles, we cannot apply these rules to an unchanging universe of investments—or an unchanging economic and political environment. Everything is in a constant state of change…” our Sir John Templeton wrote as number 14 of his “16 Rules for Investment Success.” Consider this:

  • The first US vice-presidential candidate of Black and Asian American descent is on the ballot, reflecting America’s changing demographics.
  • A high portion of the electorate is likely to vote absentee or by mail. It may take longer to tally results, providing uncertainty and grounds for disputes. Some congressional results and perhaps the presidential result will not be known immediately after election day. This could create market volatility on the days following the election.
  • The US Senate’s slow process for advancing major legislation has made it easier for investors to predict policy changes. Often called “the world’s greatest deliberative body” due to its longer terms, smaller size, and statewide constituencies, the Senate historically led a more collegial and less partisan atmosphere than the House of Representatives. The Senate filibuster, which requires 60% of the Senate to agree to pass major legislation, required some cooperation between the political parties.
  • Investors have often preferred “gridlock” in Congress. The days of the Senate filibuster are likely numbered as both presidential candidates indicate an openness to eliminating it.

In the past few years, the filibuster rules were modified for some budget and tax issues, and political and judicial nominations. A change to the remaining Senate filibuster rules will make it more likely that major legislation affecting investors will be implemented and then perhaps retracted when a future Congress is of a majority different party.