Inaugurating a New Era for Your Portfolio

The United States has elected and sworn in a new president, and the White House—along with majorities in the U.S. Senate and House of Representatives—are represented by the Democratic Party for the first time since 2011. Meanwhile, the entire world is trying to overcome a global pandemic.

If there was ever a time to consider how fundamentals might affect your portfolio, this might be it.

What to Expect

In the short term, President Biden has said he’ll focus on eradicating COVID-19 through expanded vaccine distribution and economic aid.

For the long term, based on Biden’s presidential platform and proposed cabinet picks, it’s probably a safe bet that the new administration will take a more global approach to international relations than the last four years, during President Trump’s  “America First” agenda.

On the domestic front, many expect the focus to shift to programs that help those in financial need, with funding to come from high earners. For example, Biden ran on a platform to raise income taxes on people making more than $400,000 per year, using the increased tax revenue to fund programs to help those struggling financially.

Many expect the Biden camp to propose increased spending on infrastructure and plans for conversion to greener energy, the latter being part of his climate change initiatives.

Small Caps, Value Stocks, & Traditional Dividend Payers

You’ve probably already considered what a post-pandemic recovery might look like. Now that the elections are behind us, some priorities to address the pandemic that were part of the Biden campaign platform are likely to be implemented. “With a Democratic majority, you can probably expect more wide-sweeping policies that address COVID-impaired individuals and businesses more aggressively,” said Viraj Desai, senior manager, portfolio construction at TD Ameritrade.

That could include benefits to firms in the domestic small-cap segment as well as hard-hit businesses such as the airline and cruise industries. Other value stocks that pay dividends may be helped in other ways. Some banks and financial brokerage firms that rely on revenue based on bond interest rates could also see a boost. If the yield curve continues to steepen (i.e., the spread between short- and long-term rates continues to widen), those banks and firms will likely benefit by earning more money on the client assets they hold.

Increased rotation out of “safe-haven” stocks and into higher-risk investments may also pick up in the long term with more certainty on the horizon out of Washington, D.C.

International Markets, Energy, & ESG

“Now might be a good time to consider diversification into some global stocks,” said Desai, noting that the International Monetary Fund’s World Economic Update projects the highest growth rates to come from emerging markets as the pandemic recedes. “Think about large stocks that are their versions of an Amazon (AMZN)” in China or Brazil, he commented. As with the United States, use of technology has increased during the pandemic in emerging markets, but the adoption curve is steeper and potentially lucrative for Amazon-type firms as these economies recover and more retail transactions are done online.

After a dismal 2020, the Energy sector is also getting more attention with expected economic improvements. Desai suggested looking at companies that are part of energy infrastructure or pipelines, such as MLPs (master limited partnerships), which can be found on publicly traded exchanges. Investments in securities of MLPs involve risks that differ from an investment in common stock. MLPs are controlled by their general partners, which generally have conflicts of interest and limited fiduciary duties to the MLP, which may permit the general partner to favor its own interests over the MLPs. “They tend not to be as dependent on oil price fluctuations and more sensitive to the demand of pipelines,” Desai explained.

Given Biden’s public stance on social programs and climate change, ESG investing is getting more attention. ESG refers to environmental, social, and corporate governance, which are the three central factors used in measuring the sustainability and societal impact of an investment in a company or business. Examples include a manufacturer’s operational goal of becoming net-carbon neutral, a cosmetic company that bans animal testing, or a firm that expands beyond its mandate of manufacturing widgets to improve the social fabric of the community in which its employees live and work.

Desai cautioned that selecting these stocks can require a large amount of research. As an alternative, there are multiple mutual funds and exchange-traded funds (ETFs) that have already done due diligence in companies to create a portfolio of firms that adhere to ESG standards.

Other Considerations

As the year progresses, there might be other considerations to keep in mind.

The federal budget deficit of $3.1 trillion in fiscal year 2020 is more than triple the deficit for fiscal year 2019. That’s 15.2% of America’s gross domestic product and the greatest deficit as a share of the economy since 1945. Don’t be surprised to see proposals for both higher taxes and plans to overhaul expenditures in an effort to help balance the budget.

The balance of power in the United States has shifted to the left, with a platform that’s expected to include social reform and green energy. But that doesn’t mean the GOP is going away in America’s two-party system. Desai also noted the deep-seated populist movement may only get louder, and Biden, known for bringing diverse points of view to the table and leaving with some type of agreement, will have his work cut out for him.