Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 382

MFS Investments: Blue wave fails to reach shore

While the final outcome of the US general election remains undecided, a few things have become clear: Republicans appear poised to retain control of the Senate and look likely to narrow the Democrats’ majority in the House of Representatives. The presidential race hangs in the balance, but even if former Vice President Joe Biden prevails over incumbent Donald Trump, he will likely find himself constrained legislatively.

The outlook suggests that markets anticipate lower levels of stimulus than would have occurred under a 'blue wave' scenario in which the Democrats swept both houses of Congress with comfortable majorities and regained the White House.

Markets expected such an outcome in recent weeks and priced in a 'reflation trade', pushing up long-term interest rates, value stocks, cyclical names and small-cap equities. Much of that trade is being unwound, flattening the yield curve, pushing long-term rates, real yields and inflation expectations lower while boosting stay-at-home equities, large caps, and high-tax- paying companies and undermining renewables, infrastructure and companies taxed at lower rates.

Volatility measures have declined, but the CBOE Volatility Index (VIX) futures curve remains inverted and elevated relative to its history, suggesting higher-than-normal levels of volatility into early 2021.

Should Vice President Biden ultimately win, in my view he would enter office with a weak mandate relative to expectations given his underperformance and the underperformance of his party. However, the executive branch wields a great deal of power when it comes to the nation’s regulatory framework. Therefore it will be interesting to see, if Biden does win, whether his approach to regulation will also be constrained. US presidents additionally exercise tremendous power on the trade front. In this area a President Biden would be less confrontational than President Trump.

Here are our takeaways assuming a Biden victory:

  1. A multitrillion-dollar stimulus package that includes elements of the Green New Deal is likely off the table.
  2. A public option for health care insurance is also unlikely given the projected makeup of the next US Senate.
  3. The Senate will almost certainly block Biden’s plan to raise taxes on corporations and high- earning individuals.
  4. One area of potential bipartisan agreement on fiscal policy could be a moderately sized infrastructure package, given the combination of relatively high unemployment as a result of the pandemic, along with near-record-low borrowing rates.

Regardless of the election’s outcome, the economy remains impaired by the pandemic and the outlook has been complicated by the fact that the trajectory of profit margins peaked and was heading lower long before the pandemic triggered the recession. Further, a vaccine won’t cure a decade of increasingly leveraged corporate balance sheets.

Against this uncertain backdrop, we continue to seek to own companies we think will survive and emerge stronger when the pandemic subsides — with or without stimulus — while avoiding those we believe are structurally disadvantaged.

 

Robert M. Almeida is a Global Investment Strategist and Portfolio Manager at MFS Investment Management. This article is for general informational purposes only and should not be considered investment advice or a recommendation to invest in any security or to adopt any investment strategy. Comments, opinions and analysis are rendered as of the date given and may change without notice due to market conditions and other factors. This article is issued in Australia by MFS International Australia Pty Ltd (ABN 68 607 579 537, AFSL 485343), a sponsor of Firstlinks.

For more articles and papers from MFS, please click here.

Unless otherwise indicated, logos and product and service names are trademarks of MFS® and its affiliates and may be registered in certain countries.

 

RELATED ARTICLES

The 2020 US presidential elections

Capital Group: What the U.S. election means for investors

Should America follow Australia with a sovereign wealth fund?

banner

Most viewed in recent weeks

Raising the GST to 15%

Treasurer Jim Chalmers aims to tackle tax reform but faces challenges. Previous reviews struggled due to political sensitivities, highlighting the need for comprehensive and politically feasible change.

Here's what should replace the $3 million super tax

With Div. 296 looming, is there a smarter way to tax superannuation? This proposes a fairer, income-linked alternative that respects compounding, ensures predictability, and avoids taxing unrealised capital gains. 

100 Aussies: seven charts on who earns, pays, and owns

The Labor government is talking up tax reform to lift Australia’s ailing economic growth. Before any changes are made, it’s important to know who pays tax, who owns assets, and how much people have in their super for retirement.

9 winning investment strategies

There are many ways to invest in stocks, but some strategies are more effective than others. Here are nine tried and tested investment approaches - choosing one of these can improve your chances of reaching your financial goals.

The rubbery numbers behind super tax concessions

In selling the super tax, Labor has repeated Treasury claims of there being $50 billion in super tax concessions annually, mostly flowing to high-income earners. This figure is vastly overstated.

With markets near record highs, here's what you should do with your portfolio

Markets have weathered geopolitical turmoil, hitting near record highs. Investors face tough decisions on valuations, asset concentration, and strategic portfolio rebalancing for risk control and future returns.

Latest Updates

Investment strategies

Finding income in an income-starved world

With term deposit rates falling, bonds holding up but with risks attached, and stocks yielding comparatively paltry sums, finding decent income is becoming harder. Here’s a guide to the best places to hunt for yield.

Economy

Fearful politicians put finances at risk

A tearful Treasury chief, a backbench rebellion, and crashing bonds. What just happened in the UK and why could Australia’s NDIS be headed for the same brutal fiscal reality?

Shares

Investing at market peaks: The surprising truth

Many investors are hesitant to buy into a market that feels like it’s already climbed too far, too fast. But what does nearly a century of market history suggest about investing at peaks?

Shares

Chinese steel - building a Sydney Harbour Bridge every 10 minutes

China's steel production, equivalent to building one Sydney Harbour Bridge every 10 minutes, has driven Australia's economic growth. With China's slowdown, what does this mean for Australia's economy and investments?

Investment strategies

Will stablecoins change the way we pay for things?

Stablecoins have been hyped as a gamechanger for the payments industry. But while they could find success in certain niches, a broader upheaval of Visa and Mastercard's payments dominance looks unlikely.

Infrastructure

An investing theme you can bet on for the next 30 years

Investors view infrastructure as a defensive asset class rather than one with compelling growth prospects. These five tailwinds for demand over the coming decades suggest that such a stance could be mistaken.

Investment strategies

A letter to my younger self: investing through today's chaos

We are trading through one of history's most confounding market environments. One day, financial headlines warn of doomsday scenarios. The next, they celebrate a new golden age. How can investors keep a clear head?

Sponsors

Alliances

© 2025 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.