Legacy Wealth Alliance Family,
Today, we are exactly 25 days until the election. After barely 20 minutes of watching the Presidential Debate last week, and becoming more and more emotionally charged, I finally had to turn it off. I only have two questions: 1. When are “we the people” going to put up quality candidates, from either party, that we can vote for instead of voting against? 2. How is it that the Russians allegedly were able to infiltrate our democratic process by manipulating social media in 2016, but they have been unsuccessful in shutting down either candidates Twitter or Facebook accounts? There are certain things that happen, I may never understand during my lifetime. With the wide divide in politics, unlike anything I have ever experienced, politics is an emotional event. The more you learn and the more you engage, which many people are, typically the more emotional one becomes on “the issues”. Do not worry, this Commentary is not a forecast about who is going to win come election night. Politics, while important, I am going to leave to the pundits. What I thought would be helpful is to remove that emotion, and review some of the facts and data points at this moment regardless of your political affiliation. Particularly to what we all have in common, which is money, wealth, and the stock market.
Polls & Popular Votes Do Not Determine Elections
In the Presidential election of 2016, Hillary Clinton won the popular vote (48.2%) compared to President Trump (46.1%) and still ended up losing the election. As the polls stand at this moment, Joe Biden has roughly a 7% lead and is gaining momentum. Interestingly, this was about the same margin in the polls Hillary Clinton held in 2016. However, our system is not based on either metric, but the electoral college. To win the presidency, a candidate must get 270 electoral votes. As of September, Joe Biden is projected to have 232 supporting him, and Donald Trump 204, giving Biden a 28 vote lead. As in most elections, there are a handful of small battle ground states that determine the presidency. Here are those states and their electoral votes: Florida (29), Pennsylvania (20), Michigan (16), North Carolina (15), Arizona (11), and Wisconsin (10). Of these states, Florida is the most critical. If Trump wins Florida, as he did in 2016, he would be tied with Biden and the candidates would scramble for the remaining votes. If Biden wins Florida, he only needs one of the remaining states and Trump would need all remaining states to win.
Policy, Not Politics, Matters Most for the Economy & Markets
Politics, while emotional, are not measurements for the long-term health or direction of the markets. Presidential and Congressional policy are a much better metric. At this point, and with the wide divide among parties, it is unlikely we will see additional government stimulus due to the impacts of COVID until after the election. Congress could get something past in the next 25 days, but it could run up until the final hour. As it relates to the policy agendas, there are wide divides between Trump and Biden in multiple categories; Taxes (tax cuts, tax hikes), Trade especially with China (greater protections, moderate protections), Energy / Climate Change (relaxed, tougher), Regulation (decrease, increase), and Immigration (stricter, looser). There are also a few similarities; increase in Infrastructure Spending and more regulation in the technology sector, mostly in Social Media. Incidentally, an Infrastructure bill is expected sometime in 2021. This will not only improve American infrastructure (bridges, roads, dams, etc.) but also create jobs. Technology, as an investment sector, has seen tremendous growth over the last 10 – 12 years. There is concern with the increased regulation expected, this sector could see some stagnation (no growth) or decline. May be prudent for those of you that have large single stock positions in tech to call us to discuss.
Do Not Let the Emotions of Politics Overrule the Logic of Investing
As I have shared, one of the big benefits of having us, is to have a buffer to ensure your emotions do not override sound logic. The wealth and assets you have placed in our care, is not emotional to us and we communicate with you in terms of the logic of investing. My money, and my family’s wealth, is emotional for me. Losing money is emotional. Keep in mind though, when you go to cash in a declining market, while you may have relieved the short-term pressure, you have simultaneously caused a bigger problem you must solve. That is, when it is “safe” to go back in. We have a few clients, that are still sitting in cash since the Financial Crisis of 2008 arguably missing out on the best and longest bull markets in history. Had a client this week whose spouse lost their job. Their emotional response was to refinance the house and pull out all the equity. While no one knows for certainty how long this job loss will last, it is best not to “fire the gun” until absolutely needed. At the same time, planning for contingencies and the “what ifs” are also important so you can at least see the targets, before you “shoot”. Was thankful this client called us to discuss. We are here to help you through your own emotions.
It Has Been a Volatile Year, but the Market Has Rebounded Strongly
The older I get, the less dependent I become on my short-term memory. The same can be applied to 2020. Less we forget, the S&P 500 was down almost -35% in 3 weeks between late February and early March. The fastest move from a bull to bear market in history. (Side note: We were so proud of all of you that stayed the course during this scary time. I can count on two fingers how many of our clients went to cash. VERY well done!) Today, the market is in positive territory for the year, thus far, and trading near all times highs again. Patience, as it relates to investing, almost always pays off if you give it enough time. Looking at the S&P 500 over the last 40 years, intra-year declines have been common averaging -13.8% per year. That said, annual returns have been positive for the year in 30 out of 40 years (75%). Therefore, short term market volatility is not only expected, but healthy. As an example, in 2010 there was an intra-year drop of -28% but the annual performance of the S&P 500 for the year was up 23%. Do not be afraid of volatility, find a way to embrace it… within reason.
Time in the Market Has Dampened the Impact of Volatility
We prefer not to invest your money in the market if your timeframe is less than 3 years. Due to volatility. At the same time, if you are 3 years away from your projected retirement, we start dialing your risk back to more conservative investments to preserve your gains, refusing to risk them. When looking at diversified returns of 50% stocks and 50% bonds portfolio over the last 70 years through 2019, the worst annual total returns have been for 1 year was -15%, 1% (5 year), 2% (10 year), 5% (20 year). The best total annual returns were 33% (1 year), 21% (5 year), 16% (10 year), and 14% (10 year). These represent the worst and best annual total returns over the last 70 years historically, assuming you stayed invested through all market cycles. The lesson: The more time you have IN the market, the LESS the impacts of volatility have had on your overall total returns.
The S&P 500 Has Been a Reliable Predictor 90 Days Prior to the Election
I saved the best for last. We are in “The Final Countdown” (email me with the name of this Swedish 80s band…. no Googling) to the election. Since 1928, the performance of the S&P 500 index for the three months prior to the Presidential election has successfully predicted the winner 87% of the time. Historically, when the index is up for those three months, the incumbent party tends to hold onto their seat in the White House. When the index is down for this three-month period, the party not in power tends to be elected. While we don’t know for sure if the performance of the S&P 500 and the results on November 3rd speaks to causation, correlation, or neither, it is an interested tool to impress your friends with and brings some level of predictability to an unpredictable year and campaign season. Through the close of business yesterday, October 8th, the S&P is up 4.62% since August 3rd. With this tool and high predictability, now anyway, states that President Donald Trump will maintain his residence on 1600 Pennsylvania Avenue. You can track the S&P 90-day performance on this website: https://bcelection.wpengine.com/. One thing 2020 has taught me is nothing is “normal”. Even when it “looks” normal. Trump being re-elected has certainly changed in the light of COVID-19. An incumbent president has won re-election 65% of the time since the Civil War. However, in all instances where the incumbent lost, there was a recession or depression during their term. The economy is in a recession and unemployment is the highest it has been since the Great Depression. The swing factor will be the public perception of how he, and Congress for that matter, have handled this current crisis. During 9/11, President George W. Bush’s approval rating soared 30%.
Recall the stock market has been more proactive, than reactive to things it sees and knows are coming. It is aware the elections are coming November 3rd and does not seem to care who will occupy the White House or which party will take over Congress. Thus, being able to price in those variables. Honestly, we are surprised we have not seen more negative market volatility at this point. After the first Presidential Debate last week, I thought the market was going to respond poorly and decline. It did not. The following day the Dow Jones was up over 300 points. However, the markets have not liked uncertainty or things that are unpredictable, such as human emotions and behavior. If there are protests post the elections, and they are peaceful, probably not going to send the markets into decline. However, if there is rioting, violence, and major destruction in major cities, although short term, the volatility may likely increase. I am hopeful that emotions do not over-run the commonality of us united as human beings, decency, love, and respect. If these events escalate, and end up in tragic behavior, it may be a little bumpy. However, the markets have been influenced by economies and public policy more than media reporting. I implore you to turn off the news that will heighten your emotions. If it becomes overwhelming, please call us. We are here for you and take our trusted role in your families and businesses, seriously. At the very least, please ensure you vote. THIS you can control for sure.
In closing, I want to quote that great leader and almost President, Porky Pig from the Bugs Bunny Independent Party who said, “Ably, ably, ably…. that’s all folks!” Enjoy the fall weather and Happy Halloween.
Pursuing Wealth, Wisdom, and Well Being Together,
This information does not have regard to the specific investment objectives, financial situation and the particular needs of any specific person who may view this information. Statements, opinions, and forecasts made represent a particular observation and assessment of the market environment at a specific point in time and are not intended to be a forecast of future events or a guarantee of future results. Investors should seek financial advice regarding the appropriateness of investing in any securities or investment strategies discussed or recommended. Statements regarding future prospects
may not be realized and may differ materially from actual events or results. Past performance is not indicative of future performance.