Point of view: Elections are not a good starting point for investment decisions

Joe Biden will be sworn in as the 46th President of the United States on January 20, 2021. This sentence can probably be said now without caveats. Barring unlikely developments, Biden's lead cannot be caught. Foreign heads of state and government are already congratulating him, as are some representatives of the Republican Party, among them the former president, George W. Bush. The chances of turning the result around legally seem miniscule. Trump's team will find it difficult to raise sufficient funds to cover the numerous costly legal challenges, especially as most would consider them to have little merits. 

While the outcome of the presidential election is certain, the result of the Senate elections remains uncertain. We continue to expect a Republican majority, but likely by-elections for up to two Georgia senators on January 5 could change that. Investors are understandably worried about the implications for their portfolios of a major change of course such as that produced by the U.S. elections. We would advise, however, against basing long-term investments on an election and what takes place immediately after, for the following three reasons. First, the uncertainty about future policy; second, uncertainty about the impact of policy on economic and business prospects; and third, uncertainty about what the markets have already priced in.

The first area of uncertainty is what remains unclear after Biden’s victory. What will his cabinet look like? How much consideration will he give to the different wings of the Democratic Party? What are his priorities and scope to implement his plans? Who will win the majority in the Senate1)? Is a "blue wave", i.e. Democratic Party control of both the presidency and Congress, still possible? There are many question marks. Although Biden has already mentioned his four core issues (Covid-19, economic revival, climate change and racial equality), it remains to be seen what the economic consequences will be.

The second large area of uncertainty we mentioned is the degree to which political priorities actually influence headline economic figures. To give only two examples: where the macro-economy is concerned, is a massive stimulus program going to have a positive impact on the dollar as growth prospects improve? Or will it have a negative one, given that large stimulus implies higher government debt? And at the microeconomic level, how will the earnings prospects of individual sectors be affected by political choices? The previous presidential election illustrates our point. The sectors favoured by Trump in 2016 - steel, oil, coal, and hotels and real estate - have in fact largely performed worse than the economy as a whole. Ultimately, political conditions are only one factor among many that influence the economic prospects of a sector, and perhaps a smaller influence than one might think2).

Which brings us to our third point: that politics, only one of many factors determining the earnings outlook, has even less bearing on stock market valuations. Trump's support for the oil industry, for example, has done little to help it in the face of the shift to greener energy and global overcapacity. This is compounded by market uncertainties related to the election. To what extent had the stock market already priced in Biden's victory and a divided government? Volatile trading around the election leaves a lot of room for interpretation. Until recently a narrow, closely contested election outcome was considered by many to be the worst case scenario for the stock market. But in no time at all it turned into an ideal scenario: a moderate Democrat president who will be put in his place by a Republican Senate if he increases debt too much or reverses Trump's tax cuts.

All this underscores our recommendation that longer-term investment decisions should not be based solely on political considerations – and especially if the political outlook is still unclear. The government has little influence over major market-determining factors, such as, in the short term, the further course of the pandemic. The leap in equity markets in response to news on a vaccine on Monday showed this. Central bank policy, meanwhile, is a major influence in both the short and long run. Not only in the US central banks are likely to continue to try to support markets with low interest rates and, if necessary, other means. But the central banks’ medicine will flow less fast if there is progress on the vaccine and the pandemic.

We therefore remain moderately positive on the stock markets for the next twelve months. We expect the low interest rate environment to continue and do not see a sustained weakening of the dollar against the euro.

1)One hint we would allow ourselves on the much-discussed topic of Senate majority: it is far less a binary decision than assumed. A single vote, even if it secures a majority on paper, does not always make the difference between a bill being passed or rejected by the Senate. Party discipline is regularly insufficient for this, since senators also follow particular interests.

2)Trump's broad-based reduction of corporate profits is certainly an exception.


Sabina Díaz Duque
+49 (0)69 / 910 14177

Mirjam Eckert
+49 (0)69 / 910 43248

About DWS Group
DWS Group (DWS) is one of the world's leading asset managers with EUR 759bn of assets under management (as of 30 September 2020). Building on more than 60 years of experience, it has a reputation for excellence in Germany, Europe, the Americas and Asia. DWS is recognized by clients globally as a trusted source for integrated investment solutions, stability and innovation across a full spectrum of investment disciplines.

We offer individuals and institutions access to our strong investment capabilities across all major asset classes and solutions aligned to growth trends. Our diverse expertise in Active, Passive and Alternatives asset management – as well as our deep environmental, social and governance focus – complement each other when creating targeted solutions for our clients. Our expertise and on-the-ground-knowledge of our economists, research analysts and investment professionals are brought together in one consistent global CIO View, which guides our investment approach strategically.

DWS wants to innovate and shape the future of investing: with approximately 3,400 employees in offices all over the world, we are local while being one global team. We are investors – entrusted to build the best foundation for our clients’ future.


Important Note
This release contains forward-looking statements. Forward-looking statements are statements that are not historical facts; they include statements about our beliefs and expectations and the assumptions underlying them. These statements are based on plans, estimates and projections as they are currently available to the management of DWS Group GmbH & Co. KGaA. Forward-looking statements therefore speak only as of the date they are made, and we undertake no obligation to update publicly any of them in light of new information or future events.

By their very nature, forward-looking statements involve risks and uncertainties. A number of important factors could therefore cause actual results to differ materially from those contained in any forward-looking statement. Such factors include the conditions in the financial markets in Germany, in Europe, in the United States and elsewhere from which we derive a substantial portion of our revenues and in which we hold a substantial portion of our assets, the development of asset prices and market volatility, the implementation of our strategic initiatives, the reliability of our risk management policies, procedures and methods, and other risks.


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