An Executive Order to Strengthen Oversight of Large Companies, May be an Opening for Smaller Players

 

The Biden administration is said to be putting the final touches on an executive order to direct agencies to strengthen oversight of industries that are dominated by a few large companies. This would be a wide-ranging attempt to rein in big business power across affected sectors of the economy. The move could allow smaller innovative companies to be less overshadowed, while throwing a little cold water on the ever-growing giants in their sectors.

The executive order, which President Biden could sign as soon as this week, would direct oversight from regulators of a long list of industries. This could force regulators of pharmaceutical, transportation, energy, utilities, banking and other industries, to revisit their rule-making process. The goal would be to inject more competition and to give consumers, workers, and suppliers more ability to challenge large producers or providers.

 

Shining a Light on Potential

The order would come less than two weeks after the Russell Index
rebalancing demonstrated just how large, in terms of capitalization, many companies have become. Assuming that all companies go through a growth phase that begins near zero, the disparity between large, the comparatively small, and those that are smaller is widening. This executive order may bring what some would consider an equitable solution to the competition gap.

 

How This Could Impact Investors

The Securities and Exchange Commission (SEC) regulates all things related to publicly traded U.S. companies. The name Citadel Securities became a household name among investors earlier this year as online brokers banned some WallStreetBets driven “Buy” and even “Sell” orders. The reasons for the unusual restrictions on trading may include protecting large securities firms like Citadel where 47% or retail volume is transacted, or Citadel’s large trading partners. Under the President’s order the SEC may have the power to address big versus smaller firm issues like this more quickly. This is one way retail investors may find more trust in their ability to trade on an even footing with their small accounts through a small or mid-size broker.

Performance of companies categorized as small-cap are exceeding large-cap stock performance year-to-date 2021. Over a longer period, they are still lagging their historic outperformance. As many expect a return to a stable and growing economy will help the return of the long-term relative average performance of small and microcap stocks; orders such as this could dampen large companies enough to moderate their growth and provide light for deserving companies that are less well capitalized. The intentional government support, even if only regulatory, if enacted could allow regulatory approvals for projects, money for research, grants for studies, and an overall experience of more clearance for smaller company projects and products.

Investors considering that the potential is higher for smaller companies, will want to pay attention to the exact wording, and how successful any challenges to its legality may be.

 

Paul Hoffman

Managing Editor, Channelchek

 

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https://tokenist.com/citadels-1-billion-silver-bet-a-trap-for-wallstreetbets/

https://nypost.com/2021/06/30/bidens-big-business-crackdown-bad-for-wall-street-behemoths-sources/

 

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Image Credit: McConnell Center (flickr)

Federal Marijuana Laws are Half-In/Half-Out Says Justice Clarence Thomas

 

U. S. marijuana law enforcement may not be “proper,” according to a statement written by Supreme Court Justice Clarence Thomas.  The legal opinion made public Monday (June 28) was in response to a case the court was asked to consider.  That case, which involved a Colorado marijuana business attempting to challenge the tax burden created by federal prohibition and 280E, is a “prime example” of the “mixed signals” coming from the federal government regarding cannabis, according to the Supreme Court justice.

 

Thomas’s Statement

Thomas wrote that the previous Supreme Court ruling from 2005 – Gonzales
v. Raich – may now have no legal usefulness because the federal government has taken a hands-off approach to today’s marijuana industry, effectively rendering its own prohibition out-of-date.  Thomas wrote that a new case they were asked to review is an example of the problems with the conflicting standards coming from the federal government today.  The previously decided case mentioned, Gonzales v. Raich, refers to the 2005 SCOTUS case that may have been used as precedent. It involves a California medical user in 2002 (California approved medical in 1996) who had plants destroyed by federal authorities.

In Thomas’ words, “A prohibition on intrastate use or cultivation of marijuana may no longer be necessary or proper to support the federal government’s piecemeal approach,” in an opinion that denied a Colorado retailer a Supreme Court hearing in a legal battle over the merits of Section 280E of the federal tax code. IRS code 280E is part of the IRS law that states that businesses selling cannabis (or any other federally illegal controlled substance) cannot deduct any expenses incurred in the production, distribution, and sale. The case represents the struggle of many cannabis-related businesses that are operating legally under their state laws, but are by the letter of federal law, second-class business owners at best, and felons at worst. Part of Thomas’ statement discusses marijuana businesses that could be trying to protect themselves by having armed security (firearms laws) while at the same time trafficking in a Schedule 1 substance. He also pointed out inconsistencies in banking practices brought on by federal prohibition, practices which actually increase the need for armed security.

Excerpt from June 29, 2021 Statement by Justice Thomas

Take-Away

Thomas is considered by many to be the most conservative member of the Supreme Court. His formal statement is impactful for marijuana businesses in that it denied hearing the case while suggesting federal cannabis laws and policies ought to be consistent. This was made clear in his words, “Whatever the merits of Raich when it was decided, federal policies of the past 16 years have greatly undermined its reasoning,” and “The Federal Government’s current approach is a half-in, half-out regime that simultaneously tolerates and forbids local use of marijuana.” The Supreme Court, or any court for that matter, can not serve de facto law and laws which are on the books.

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Sources:

https://www.supremecourt.gov/opinions/20pdf/20-645_9p6b.pdf

 

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Image Credit: Reji (Flickr)

What are Tax Havens? The Answer Explains Why the G-7 Effort to end Them is Unlikely to Succeed

 

Close your eyes and imagine a tax haven. Does a Caribbean island come to mind? Sand, surf and thousands of post office boxes housing shell corporations?

Some tax havens, like the Cayman Islands or Bermuda, fit that description. Many others do not.

The key to a tax haven is the taxes, not the tan. Any place that allows a taxpayer – whether an individual or a company – to get a lower tax bill overseas than at home is a tax haven. Thus, depending on the taxpayer’s jurisdiction and business, many places turn out to be tax havens, even the United States.

A recent agreement by the Group of Seven wealthy nations seeks to eliminate corporate tax havens by imposing a global 15% minimum corporate tax rate. However, as a tax expert, I find the effort hard to take seriously.

Put simply, tax havens are jurisdictions that offer low or even no taxes in a bid to attract foreign investment.

From a taxpayer’s perspective, the first sign of a good tax haven is that it’s completely legal. While there may be a perception that people who use tax havens to lower their tax bills are breaking the law, that’s rarely the case.

A taxpayer who is comfortable doing that does not need a tax haven. Instead, a dishonest accountant and a less honest banker are all that’s required.

The second sign of a good tax haven is transparency, political stability and rule of law. If it costs more in lawyers, accountants and bribes to avoid taxes overseas than it costs to pay the tax at home, there is no point to a tax haven.

The third sign is privacy. For many years, Swiss banks provided the gold standard in that regard by refusing to reveal anything about their depositors to anyone. That changed in 2008, when Swiss banks agreed to report on their depositors to 43 European countries.

The loss of the complete secrecy that Switzerland once provided has made shell companies – and the countries that make them easy to set up – much more attractive. Shell companies are basically companies without active business operations or significant assets that are stacked one on top of the other to make it harder to trace ownership.

 

 

In the Eye of the Beholder

Identifying a tax haven isn’t as simple for the government’s intent on controlling them as it is for the taxpayers who seek them out. This is mainly because governments and international organizations tend to think a tax haven is somewhere other than where they live.

For example, the European Union produces an annual list of tax havens that contains no EU member countries, even though many other lists identify Ireland, Luxembourg, and a host of other European countries as tax havens.

And while several groups have described the United States as a tax haven – Forbes even calls it the best in the world – the U.S. government would never do so, even though it fits all the key criteria, such as providing legal ways to avoid virtually all taxation and strong taxpayer privacy.

The Race to the Bottom

This is why the G-7 global corporate minimum 15% tax agreement is unlikely to work.

Of course, I applaud the effort. Without a minimum tax, countries are stuck in a never-ending race to the bottom, whereby every time one government cuts its corporate tax rates, another soon follows with even lower rates.

The problem is the G-7 has to get more than 130 other countries to go along with its minimum tax rate. Many countries, including Ireland and China, seem unlikely to give up something that has brought them so much economic advantage.

 

This article was republished with permission from The
Conversation, a news
site dedicated to sharing ideas from academic experts.  It was written by
and represents the research-based findings and opinion of  Beverly Moran, Professor Emerita of Law, Vanderbilt University

 

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Companies Developing Therapeutics to Fight Covid-19 Will get a $3.2 Billion Injection

 

Some antiviral pills related to coronavirus will get a $3.2 billion shot in the arm to help accelerate testing and development of therapeutics to combat the Covid-19 virus. This was announced (6/17/21) by the Department of Health and Human Services.

“New antivirals that prevent serious Covid-19 illness and death, especially oral drugs that could be taken at home early in the course of disease, would be powerful tools for battling the pandemic and saving lives,” said President Biden’s, chief medical adviser, Dr. Anthony Fauci.  

The $3.2 billion allocated will be from the $1.9 trillion coronavirus relief package Biden signed into law in March.  Dr. Fauci said the funding could accelerate clinical trials “already in progress” for some antiviral pills and potentially make candidates available by year’s end. He noted that antiviral pills that patients can use to self-treat at home would serve as an important compliment to vaccinations in preventing severe illness or hospitalization.

There are a number of small and microcap biopharmaceutical companies that are in various stages of exploring new antiviral treatments for Covid and other threats. With Washington’s $3.2 billion as yet unallocated support, perhaps some of these are worth visiting.

CoCrystal Pharma, Inc. (Nasdaq:COCP) is a clinical-stage biotechnology company employing its unique structure-based technologies and Nobel Prize-winning expertise to create and develop first- and best-in-class broad-spectrum antiviral drugs for serious and/or chronic diseases. These technologies are designed to efficiently deliver small-molecule therapeutics that target the viral replication process and are safe, effective and convenient to administer. Cocrystal’s development programs include influenza, COVID-19, hepatitis C and gastroenteritis caused by norovirus.

52 Week Range $0.76-$3.46

CytoDyn, Inc. (OTC:QB CYDY) Inc. is US-based clinical-stage biotechnology company which focuses on the clinical development and potential commercialization of humanized monoclonal antibodies to treat Human Immunodeficiency Virus (HIV) infection. IPIX will hold a webcast on June 21 to Discuss Unblinded Data from COVID-19 Long-Haulers Trial and Other Developments .

52 week price range $1.63-$10.01

Avalon GloboCare Corp. (Nasdaq:AVCO) Avalon GloboCare, a leading biotechnology company focusing on cell-based technology and therapeutics, is about to launch clinical trials of its novel blood filtration system to mitigate symptoms of a cytokine storm in COVID-19 patients and a mucosal intranasal spray vaccination against SARS-CoV-2.

52 week price range $0.87- $2.16

 

Too Many to List

Other companies at various stages of testing development can be found below the article by scrolling down. Click on the tickers for more details on their work and data on the company.

 

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Sources:

https://www.hhs.gov/about/news/2021/06/17/biden-administration-invest-3-billion-american-rescue-plan-as-part-covid-19-antiviral-development-strategy.html

https://www.nature.com/articles/d43747-020-01139-4

 

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Companies Developing Therapeutics to Fight Covid-19 Will get a $3.2 Billion Injection

 

Some antiviral medicines related to coronavirus will get a $3.2 billion shot in the arm to help accelerate testing and development of therapeutics to combat the Covid-19 virus. This was announced (6/17/21) by the Department of Health and Human Services.

“New antivirals that prevent serious Covid-19 illness and death, especially oral drugs that could be taken at home early in the course of disease, would be powerful tools for battling the pandemic and saving lives,” said President Biden’s, chief medical adviser, Dr. Anthony Fauci.  

The $3.2 billion allocated will be from the $1.9 trillion coronavirus relief package Biden signed into law in March.  Dr. Fauci said the funding could accelerate clinical trials “already in progress” for some antiviral pills and potentially make candidates available by year’s end. He noted that antiviral pills that patients can use to self-treat at home would serve as an important complement to vaccinations in preventing severe illness or hospitalization.

There are a number of small and microcap biopharmaceutical companies that are in various stages of exploring new antiviral treatments for Covid and other threats. With Washington’s $3.2 billion as yet unallocated support, perhaps some of these are worth visiting.

CoCrystal Pharma, Inc. (Nasdaq:COCP) is a clinical-stage biotechnology company employing its unique structure-based technologies and Nobel Prize-winning expertise to create and develop first- and best-in-class broad-spectrum antiviral drugs for serious and/or chronic diseases. These technologies are designed to efficiently deliver small-molecule therapeutics that target the viral replication process and are safe, effective, and convenient to administer. Cocrystal’s development programs include influenza, COVID-19, hepatitis C and gastroenteritis caused by norovirus.

52 Week Range $0.76-$3.46

CytoDyn, Inc. (OTC:QB CYDY) Inc. is US-based clinical-stage biotechnology company that focuses on the clinical development and potential commercialization of humanized monoclonal antibodies to treat Human Immunodeficiency Virus (HIV) infection. IPIX will hold a webcast on June 21 to discuss unblinded data from the COVID-19 Long-Haulers Trial and other developments .

52 week price range $1.63-$10.01

Avalon GloboCare Corp. (Nasdaq:AVCO) is a leading biotechnology company focusing on cell-based technology and therapeutics, is about to launch clinical trials of its novel blood filtration system to mitigate symptoms of a cytokine storm in COVID-19 patients and a mucosal intranasal spray vaccination against SARS-CoV-2.

52 week price range $0.87- $2.16

 

Too Many to List

Other companies at various stages of testing development can be found below the article by scrolling down. Click on the tickers for more details on their work and data on the company.

 

Suggested Reading:

Capitalism Vs Coronavirus (April 2020)	Stem Cell Based Therapies for Alzheimer’s Disease

Avalon GloboCare at the World Stem Cell Summit	HealthyLynked at the World Stem Cell Summit

 

Sources:

https://www.hhs.gov/about/news/2021/06/17/biden-administration-invest-3-billion-american-rescue-plan-as-part-covid-19-antiviral-development-strategy.html

https://www.nature.com/articles/d43747-020-01139-4

 

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image credit: CDC (Pexels)

The Case for Investing in Regenerative Medicine in 2021

 

Political change along with updated White House priorities have certainly created a need to review investment portfolios. As the national focus shifts from one area of fulfilling citizens’ wants and needs to another, some industries are getting more attention while others are put on “hiatus.” Weeding out holdings of sectors getting less federal support, and adding those that could benefit from new attention puts the probability for investment success more on your side.  We’ve seen this with the rush toward infrastructure stocks and building materials. ESG companies are similarly enjoying their moment in the sun. Digging past the larger headlines, investors can often find opportunities that aren’t well covered by the media, opportunities where the biggest move has not been missed.

 

Focusing

Last month while investors were focused on earnings season, cryptocurrencies, and interest rates, the administration released an important federal funding update that eases restrictions related to stem cell research. The update also removes a ban put in place two years earlier on important medical research using human fetal tissue. This support opens up an area of stem cell work that may lead to breakthroughs in regenerative medicine, treatments of disease, and understanding issues of aging.

Although the research dollars would be headed to centers of research like the NIH or medical research centers at U.S. colleges and universities, this research is shared. Further, it is not uncommon for centers for research to work with and provide financial support to private companies for important work. So the increased funds available can directly benefit publicly-traded and privately-owned companies in the field of regenerative medicine.

 

Discovering Companies

Life sciences companies in developing fields of research are usually sharply focused on a few small areas within the field. As an example, Lineage Cell Therapeutics (LCTX) is holding phase 1/2a clinical trials on spinal cord injury treatment, retina therapies, and phase 1 studies of a lung cancer vaccine.  Whereas another publicly-traded company working on stem cell treatments has more of a focus on aging, organ maintenance, and tissue repair is Longeveron (LGVN). How does an investor learn how to better understand the value between the different fields of work, the different stages of development, legal and ethical issues, and develop a list of companies to follow? A good way to jumpstart your knowledge base is to hear directly from the companies at a conference or summit.

Each year the Regenerative Medicine Foundation (RMF) holds its World Stem Cell Summit. This June 16^th the summit will be conducted virtually. The event is online and at no cost to registered Channelchek users. This is a perfect opportunity for investors to learn of the various disciplines, sharpen their knowledge of the different stages of medical developments, and perhaps become inspired by one or more of the presenting companies or interviews held with their management.

 

Take-Away

The year has been full of winning investment sectors and themes. One area less covered has been regenerative medicine and last month’s lifting of federal support barriers.

The businesses researching stem cells to enhance longevity, regenerate life-changing cells and organs, and provide tomorrow’s breakthrough treatments are complex. Investors immersing themselves in education, discussion, and interviews with management will have a strong advantage when developing their watchlist of these companies. The World Stem Cell Summit can serve as the no-cost place online to receive all this.

A link for more information is provided below.

 

 

Sources:

https://grants.nih.gov/grants/guide/notice-files/NOT-OD-21-111.html?utm_source=dlvr.it&utm_medium=twitter

https://www.msci.com/our-solutions/esg-investing/esg-indexes

 

A New U.S. Treasury Secretary May Mean Reshuffling Personal Investments

 

How will an incoming Treasury Secretary Janet Yellen impact the economy and markets? The 74-year-old former head of the Federal Reserve Bank and Brooklyn-born Economics Professor has been in the public eye for a long time, so she has left us many clues. It’s more than likely there will be dramatic shifts in approach in the position vacated by Steven Mnuchin. Adjusting portfolios and investment strategies to take advantage of change, particularly high impact shifts, is where opportunity lies.

On Friday, the Senate Finance Committee unanimously approved Janet Yellen’s nomination as Treasury secretary; it’s expected that she will win full Senate approval this week. Her nomination was approved 26-0 by the evenly split committee, with concerns expressed by Republicans about the President’s expensive plans for massive economic relief spending, infrastructure investment, and tax hikes. The unanimous vote from both sides of the evenly split political aisle sends the message the Senate Finance Committee is making a solid effort to work together with the Yellen appointment on economic matters.

Now on the Table

President Biden has proposed a $1.9 trillion pandemic economic plan and another proposal to spend $2 trillion more in infrastructure, green energy projects, education, and research for the purpose of advancing American competitiveness. Yellen’s confirmation hearing created an opportunity for lawmakers to discuss their discomfort executing Biden’s economic policies, which include a bigger federal debt burden and repealing parts of the stimulative 2017 tax cuts.

Yellen told senators they needed to “act big” on the proposed $1.9 trillion stimulus package or risk a longer recession and long-term economic scarring, job, and loss of revenues. Her responses to questions shed light on a new angle from which government is beginning to view debt. Some economists and policymakers are looking at the interest cost and returns generated rather than the size of the borrowing. In recent months, Treasury’s interest outlays have fallen from pre-pandemic levels due to lower rates, of course, rates on debt, which the U.S. Treasury issues with maturities as long as 30 years can rise as well.

Comments of Interest to Investors

The topics included tax policy, FOMC activities, climate change, foreign exchange, national debt, and policy surrounding China.  The following categorizes some of the more noteworthy points from her answers to the Finance Committee:

National Debt

• Yellen will review the Treasury’s debt-issuance strategy, including the weighted average maturity of federal debt
• She did not suggest major changes on the horizon.
• She said the demand for U.S. Treasury debt is sufficiently strong to meet current and proposed financing needs.
• As it relates to longer, more complex, ultra-long debt, she said it “deserves further study.”

Taxes

• Yellen promised to “work with members of Congress” on the idea of protecting households earning less than $400,000 a year from increased taxes if President Biden tries to implement his campaign promise of reversing the 2017 tax cuts.
• Another Biden proposal was repealing the cap on state and local tax deductions. The plan would effectively deliver a sizeable tax cut to higher earnings, especially in high tax states. She did not give a response one way or the other on this plan, which appears to help those least in need.  
• She did respond to jabs at Biden’s plan to reduce the threshold for the federal estate tax by saying it would impact very few.

Treasury-Fed ties

• As it relates to the economy and stimulus, she warned, “Right now, taking too little action poses the greatest risk
• As it relates to reviving several Federal Reserve lending facilities that were phased out by her predecessor that was implemented by Yellen when she was former Fed Chair and Former Chair Bernanke, she answered: “The Federal Reserve will continue to provide support to the economy through its ongoing programs and the use of its available tools, but as mandated by Congress, the 13(3) facilities funded by the Cares Act will not be available.”
• Yellen pledged not to pressure the Fed on the level of its yield targeting asset purchases: “I understand deeply why it is so important to maintain the tradition of the independence of the Fed in monetary policy.”

U.S. Dollar Value

• Yellen pledged more than once the U.S. won’t seek a weaker currency.  She did not comment on the “strong dollar” policy the Treasury once pursued
• She said the administration would work, across agencies, “to put effective pressure on countries that are intervening in the foreign exchange market to gain a trade advantage.”
• Yellen singled out bilateral deficits as an indicator of unfair trade practices, which she said she would “vigorously oppose,” although she said the gaps should be assessed in the context of the U.S.’s broader trade relationship with each country rather than a “single catch-all metric.”

China Policy

• Yellen asserted there would be no immediate lifting of tariffs on China and that the Biden administration will be monitoring China’s adherence to pledges made in the Trump administration’s “phase one” bilateral trade deal
• She assured the new administration would use the “full array of tools” to counter China’s “abusive economic practices.”
• She said the U.S. needs to compete with China’s “economic statecraft” around the world and build partnerships distinguished from President Xi Jinping’s signature Belt and Road Initiative

Climate change

• In a written response, Yellen replied: “We cannot solve the climate crisis without effective carbon pricing.”
• She reminded: “The president supports an enforcement mechanism that requires polluters to bear the full cost of the carbon pollution they are emitting.”
• She believes tax policy should be used to provide incentives for individuals and businesses to adopt “climate-friendly policies.”
• She is concerned about proposals to use stress tests on banks to determine their ability to withstand the economic impact of climate change on their assets, including fossil fuels. “Generating environmental regulation is not the mission of financial regulators,” she said.

Take-Away

Regardless of how one feels about the growing national debt or money creation, it appears the next Treasury secretary is on board with continuing the course we’ve been on. This could lead to another good showing for assets, including the overall stock market. There will be some sectors that should do better as the focus shifts more toward “green energy.” She recognizes the importance of a strong banking industry, which may inadvertently help lenders by swelling longer debt issuance we which ordinarily causes a steepening of the yield curve. Yellen seems to want to manage to a stable dollar. Weakness adds to higher exports and inflation, while a strong dollar allows Americans to buy more imported goods. The tax and redistribute policies President Biden promised while he was candidate Biden may have been softened a touch, based on Yellen’s responses; however, she is not currently part of the administration, and the concept does not sit well with a large percentage of the members of the Senate Finance Committee who supported the 2017 Tax cut in taxes.

 

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Sources:

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Continued Congressional Gridlock and Financial Market Strength

 

Last week’s election left the House and Senate in continued gridlock. Wall Street celebrated the outcome with large increases across major market indexes. There are two immediate reasons for the market rally despite an uncertain outcome in the presidential race. There is also cause for uncertainty considering the backdrop of a weak global economy with recovery efforts threatened by ongoing COVID-19 concerns.

Monetary Policy (Reason One)

Most members of Congress, regardless of party, agree fiscal support measures are necessary. However, settling on what specifically should be priorities has prevented any forward movement on an agreement. This elevates the reliance on monetary policy. Pre-election, an article in Barron’s suggested that Fed Chairman Powell “…is the most important person for investors in Washington,” the article continued, “this might loom even larger in a gridlocked nation’s capital.” Until a stimulus plan is decided, monetary policy remains the most significant means for guiding the economy. Without a new round of stimulus spending, one mathematical implication is that fewer issued treasuries will need to be sold to finance any stimulus. At the same time, the Fed will be buying bonds, at an equal or increased pace, to make up for lower fiscal stimulus. A lower supply of treasury bonds with the same or increased demand from the Fed should have the effect of raising prices, which reduces interest rates.

This is, of course, directly positive for bonds, while the lower rates are additionally bullish for equity investors. The strength last week indicates the markets are looking at continued Fed support with optimism. The prospect of continued low bond yields has been an important fuel that has helped maintain a bullish stock market.

Split Congress (Reason Two)

We’ve had a split Congress for years; why would it now suddenly inspire additional confidence in the markets? Going into the election, the markets had been hedged toward a Biden win.  Investors may be taking relief in that some of his proposals, if he is determined to be the winner, will have difficulty passing. While campaigning, Biden had proposed increased taxes on corporations and individuals. This would be economically depressive as it leaves companies with less cash to pay dividends, make share repurchases, and manage their business for the best result. Individuals, for their part, would have fewer dollars to save, invest, and use to consume. If tax increases were to be enacted, they would be expected to weaken corporate America. Investors also are aware that Biden’s plan to increase the federal minimum wage, another campaign proposal, would be harder to implement with a Republican-led Senate.

Historically the stock market performs better with a split Congress delivering a historical average annual return of 17.2% between 1950 and 2019.

GDP and S&P 500 (S&P 90) Under Same Party and Split-Party Since 1950

In a broad sense, the market reaction to the unfolding election news suggests that financial markets would prefer to see continued constraint in Washington rather than either presidential hopeful given the mandate to deliver the strongest version of their plans.

Take-Away

Equity markets usually have relief rallies after anticipated risk events. This important election was no different.  Investors that had taken a defensive position as they approached November 3rd now sense less opportunity for drastic changes in policy, regardless of who actually secures the executive branch. Investors are putting precautionary cash balances back to work and unwinding pre-election hedges.

There is  remaining uncertainty related to who will fill the oval office next year. A continued split-by-party Congress tempers the possibility of any dramatic change in laws impacting comanies. Once the electoral votes are finalized the market will have even less mystery as to what to expect in Washington going forward.

Ongoing COVID-19 concerns still are weighing on markets. Economists have been cutting forecasts for fourth-quarter growth in Europe because of increased reported cases of COVID-19. The U.S. has its own concerns related to the virus as physical distancing rules continue to hinder plans to fully reopen businesses.

 

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Sources

Why Fed Chairman Powell is the Winner No Matter The Election Results

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Why Investors Have Suddenly Turned Bullish on a Split Government

A Divided Congress Would be a Great Thing for Investors

JoeBiden.com

 

The FAANGs Come Out During Election Uncertainty

 

Investors trying to determine what impact the tight presidential race has had on the stock market may find stocks related to remote working and online communication have again become stock market leaders.

Clear election night winners include the NASDAQ 100 as indicated by futures contract trading. The tech-heavy Nasdaq 100 Index (NDX) is a basket of the 100 largest, most actively traded U.S companies listed on the Nasdaq exchange. Among the largest within the index are Apple (AAPL), Microsoft (MSFT), Amazon (AMZN), and Facebook (FB).

 

 

December 2020 contracts were up more than 3% overnight, with some of the largest gains coming after the President shared his concern about vote-counting efforts. Currently, both President Donald Trump and Challenger Joe Biden still have mathematical paths to occupying the White House over the next four years. Mega-cap stocks running out ahead of other stocks has been a theme during the COVID-19. The FAANG trend had recently reversed as election polls pointed to a Biden win.

In addition to the uncertain presidential race outcome, many expected a clear Democratic sweep within Congress. The reasoning was that Democrats are expected to be more inclined to put forth the largest stimulus package. The coming make-up of Congress is not expected to alter the strength much in either direction.

Recently the small cap Russel 2000 Index (RUT) has been outperforming the Nasdaq 100. Investors, for now, seem to be again favoring big tech in the face of a divided government, which is less likely to agree on spending plans.

David Bianco, the chief investment officer of the Americas at DWS Group Americas, Inc., has been quoted as saying, “If it’s a mixed government, it’s still a good environment for tech companies.” He gave these reasons, “You’re unlikely to get a big increase in corporate taxes. Less change, more status quo, more stability in taxes and regulation is good for all businesses including tech.”

There are benefits to Washington being unable to pass as many changes. Uncertainty as to which person or which party will hold the executive branch is likely to create speculative flows until resolved.

 

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Sources:

https://www.nytimes.com/live/2020/11/04/business/us-economy-coronavirus

https://www.investing.com/news/stock-market-news/futures-jump-in-volatile-trade-as-election-race-tightens-2340288

https://uk.finance.yahoo.com/finance/news/stay-home-nasdaq-trade-reasserts-031222341.html

https://www.wsj.com/articles/senate-election-2020-results-11604378353

https://www.cnbc.com/2020/11/04/how-the-nasdaq-and-tech-stocks-became-the-winner-on-election-night.html

 

The Election May be the Reason Smaller Stocks are Doing Better

 

The stock market is forward-looking. It trades on expectations of future values based on a world of information and investors all trying to maximize return. We’re approaching the end of October, the beginning of the holiday season, and soon the beginning of a new year. All of these have their own impact on market behavior. We will also be experiencing a U.S. Presidential election next week; this has its own set of probabilities and behavior that traders need to be aware of.

The nature of the stock market to be forward-looking may explain the winning and losing sectors month-to-date. The NASDAQ, despite all of its resilience this year, is down 1.6%. The Dow Industrials and the S&P 500 are also down for the month. The Dow by 4.8% and the S&P 500 by 2.5%. The one major index which is up is the Russell 2000. So far, in October, this small-cap index has gained 1.2%. The strength of small-cap stocks may have a lot to do with market participants looking forward to history repeating after election day.

The Data

The average return for small-cap stocks, the year following a presidential election, for the past 40 years, is 17.48%. Looking back, the least the Russell 2000 returned during these years was 2.03% (1981), the most 38.82% (2017). The major large-cap indexes don’t have this level of consistency; they also fall short in performance by a few full percentage points.  This begs the questions: Why would smaller companies outperform after a presidential election and more relevant, are they likely to outperform again next year?

Why the Outperformance?

After voters decide on who will be their President, there is a renewed focus on domestic issues that had a reduced priority during the Presidential race. The noise and distraction of political gamesmanship become severely reduced after the contest(s). Elected officials get back to their To-Do list. These lists usually include providing a positive environment for businesses and workers. For example: In 2021, we’re likely to see work on tax and trade policies, health care reform, hearings on big tech oversight, and overall creating an environment where jobs are created. 

Large multinational companies don’t benefit as directly as smaller companies in the U.S. are more likely to feel an immediate positive impact that is focusing on domestic issues has since they have a much higher percentage of their business conducted in North America.

 

S&P 500 vs. Russell 2000 10/22/15-10/27/20

Will the Streak Continue in 2021?

Market cap weighted indexes like the S&P 500 and tech heavy indexes like the NASDAQ 100 are heavily influenced by FAANG stocks. These stocks have had an amazing ride in 2020 because of lockdowns. Their strength and their increased weighting created a strong updraft for the NASDAQ and S&P 500 indexes, which are positive on the year. By contrast, the popular index of America’s small-cap companies, the Russell 2000, is down 6.3% YTD. So, in addition to four decades of market history placing odds on the side of small domestic companies with less overseas exposure, small-cap stocks are also less than one week until the election and are more attractively priced after falling out of favor. 

The run-up we’ve had in big tech and other large-caps is part of a cycle and won’t last forever. Any possible rotation into small-caps was derailed with COVID’s impact and the distractions of an election year which included impeaching a U.S. President. The potential for outperformance on those facts is strong, add to it a weakening dollar (vs. Euro) and companies with a high percentage of their business dealings done domestically also face a tailwind.

In addition to the post-election year probabilities of this group outperforming, the odds are also in their favor as GDP just posted a strong positive performance. This record growth signals an end to the recession. In an interview Michael Binger, President of Gradient Investments, had on CNBC’s 
Trading Nation said: “When you look historically, as the economy comes out of a recession — and we’re certainly going to be in a recession after the second quarter — small-caps have outperformed large caps in nine out of the last 10 economic downturns after the economy came out of the downturns. So, I think you have history on your side.”

Take-Away

Is outperformance by small-cap stocks a slam-dunk next year? The investment markets never provide a future slam-dunk possibility without caveats. There are a lot of other moving parts to consider. Analysis of the markets do, however, provide higher and lower probability of outcomes. Armed with the history of this sector in post-election years, post-recession years, with a weakening dollar, and after large-caps ran so far, I’d place this scenario in the perfect storm category for small-caps to recover relative lost performance ground in the coming year. And, possibly much more than just lost ground.

 

Suggested Reading:

U.S. Debt as a
Percentage of GDP

Small-cap Stocks are Looking Better for Investors

Investment Barriers Once Seen as Insurmountable are Falling Fast

 

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Each event in our popular Virtual Road Shows Series has maximum capacity of 100 investors online. To take part, listen to and perhaps get your questions answered, see which virtual investor meeting intrigues you here.

 

Sources:

Investing in
Small-Caps after an Election Year, CNN

Pick up Some Values in Small-Cap Stocks, Kiplinger

Small-Cap Stocks Could Keep Rising

Small-caps Historically Outperform After Recessions

Small-cap and Emerging Market Favored in Post COVID Era

The Most Popular Small-cap Index Isn’t the Best, Morningstar

Stock Market Returns

Russell 2000 History