How are Outsourced Chief Investment Officers (OCIOs) positioning around the upcoming 2020 election and potential new stimulus plan? We spoke with a few of the top OCIO firms to get their insight on what type of market trajectory investors should expect, and any tactical shifts or strategies they’re employing in anticipation of the election.
2020 Election & Potential Stimulus
Most of the OCIO firms we spoke with about the potential of a new stimulus bill and positioning around the upcoming election stated that they are not making big position moves at this time. They are, however, expecting volatility to increase substantially, and we’ve already seen the beginnings of gyrations as projected.
As many people are predicting, it’s highly likely that we will wake up the morning after the election and not know who the President is going to be, let alone who controls the Senate. Remember the year 2000? We could be dealing with rounds of litigation, and this is likely to increase volatility. Instead of trying to predict results of the election or anticipate the status of a potential new stimulus bill, the OCIOs that we interviewed are actually looking for that volatility to create opportunities. “Our team is expecting volatility to rise before and after the election and are looking for potential tactical trading opportunities as a result,” says one of the OCIOs we interviewed.
One thing North Pier Search Consulting is hearing consistently from OCIOs and the endowments, foundations, and pensions that they serve is that the public debt markets are a little less interesting than they’ve ever been. The Fed intervention is propping up prices when needed reducing opportunities, OCIOs are not making big bets on the yield curve, and almost without exception more perpetually oriented institutional investors are now looking to the private debt markets as their big foothold for that anchor.
At North Pier Search Consulting, we believe that at some point in time there will be a type of regression to the mean in terms of valuation. It’s unlikely that we’ll continue to see the massive bifurcation between a handful of technology stocks and the rest of the world. If you take a look at the history books, you’ll see that the NASDAQ virtually doubled in 1999, leaving all non-tech and telecom sectors in the dust. The next year in 2000, Russell 1000 growth stocks were down 22% and the small cap value stocks were up 22%. That rotation continued up the following year with Russell 1000 growth stocks going down an additional 12% while small value went up 14%. While there may not be a similar inflection point immediately following the 2020 election, ultimately there is going to be a regression back to normalcy in terms of equity valuations. Whether that means one index goes down much more than the other or one advances at a much greater rate, or we see a 2000/2001 whipsaw reversion of 1999, value will eventually regain the limelight. The question is how and when.
At the end of the day, it will likely come down to the trajectory of the virus. Will we see a big resurgence this winter? We’re certainly starting to see a disconcerting rise in cases, with 14 states experiencing record numbers of COVID-related hospitalizations last week alone. When will we have a viable vaccination? At this point we don’t know. What we can surmise is that once we get through COVID, things will start to normalize. Eventually, traditional valuation sentiment will be reapplied to equities. The question is ultimately how and when.