2020 US presidential election update, 11/4/2020

11/4/2020

2020 US presidential election update, 11/4/2020:

Dear Clients, Friends, and Colleagues,

Good morning.

I write to share briefly my thoughts on what the most likely outcome of last night's general election means for the stock market and LGF's investments.

(1) First, what happened: the most likely result from this election is that, come January 21, 2021, we'll have a democratic president, a democratic house of representatives, and a republican senate.

a. Presidential results: it is extremely likely that Biden is our new president elect.

Why? The most important remaining states outstanding are Michigan, Wisconsin, Pennsylvania, and Georgia - and all Biden needs in order to reach 270 electoral votes (exactly 270 electoral votes, in fact...) and win the election are Michigan and Wisconsin.

Both Michigan and Wisconsin will very likely go Biden's way once all of the heavily Biden-leaning early votes are counted.

b. Congressional results: republicans are extremely likely to retain control of the senate, and democrats will retain control of the house.

(2) I think these results - and the divided government we are likely to have for the foreseeable future - represent a positive outcome for the stock market as a whole and represent a highly positive outcome for LGF clients in particular. Here's why:

a. Reduced scrutiny of "big tech."

First, a divided government reduces the likelihood of new, heavy-handed tech regulation. Potential regulation has been an overhang for mega-cap tech stocks like Facebook, Google, et al.

This is positive for LGF clients.

b. Reduced likelihood of increased taxes.

Second, a divided government reduces the likelihood and magnitude of potential tax increases.

This is positive for LGF clients.

c. Reduced federal spending relative to what might have occurred had democrats swept the election.

Third, a divided government decreases the potential magnitude of future federal spending, including additional consumer stimulus bills.

This is a negative for the US consumer and it is an especially meaningful negative for the low-end US consumer given how economically regressive COVID-19 has proven to be. This also bodes poorly for other potential federal spending initiatives like infrastructure.

Because LGF's holdings have limited exposure to the low-end consumer and areas of the market disproportionately affected by federal spending (e.g., industrial stocks), the reduced likelihood and magnitude of near-term stimulus is not much of a negative for Long Game clients.

d. On the other hand, reduced federal spending has the side effect of applying downward pressure to long-term interest rates. This, in turn, helps support the prices of assets like stocks and real estate.

The positive side effect of reduced federal spending is continued downward pressure on interest rates. For example, yesterday 10-year treasuries yielded 0.9% and as I write they yield 0.78% - a large move.

As I have discussed in prior notes and letters, lower long-term interest rates - all else equal - are fantastic for the stock market in general and LGF clients in particular.

All told, for LGF clients there is much to like about the results of the election and very little to dislike.

For what it is worth, as well, I remain constructive on both the stock market and Long Game's holdings prospectively. Why?

a. Residential real estate - the biggest single real driver of the US economy, given the important role it plays with respect to employment and consumer savings - is in a full-blown expansion right now, as illustrated by rising housing starts and record home prices.

b. Due to buoyant home prices and a resilient US stock market, consumer net worth has never been higher than it is today. This is relevant because consumption constitutes approximately 2/3 of US Gross Domestic Product (GDP).

c. Long-term US interest rates remain near all-time lows - this century or last. All else equal, lower rates mean higher asset prices.

d. We are now past November 3rd - no more election-related hand-wringing for the time being.

e. It is reasonable to assume that there will eventually be a COVID-19 vaccine and, as I write, there are numerous potential candidates going through trials. The timing of any vaccine is extremely difficult to handicap, however. In part because of this, LGF's investments are by design relatively neutral to the duration of COVID-19's negative economic effects.

f. Lastly, in addition to our top-down logic there are always key bottom-up, investment-specific reasons for each and every LGF holding. While we are always "aware of the macro" (all investments exist in an economic context that one must seek to understand) LGF, first and foremost, invests bottom-up.

Thank you, as always, for your interest in and support of LGF. As always, please reach out if I can help with anything.

Sincerely,

Charlie