Dear Legacy Wealth Alliance Family,
Knowing last week that I was on deck to write our client commentary, I struggled trying to find something in the news noteworthy enough to write about. At first thought I considered talking about the Coronavirus’s impact on the economy & financial markets but felt that had already been covered. Second, I considered writing about year-end items pertaining to your portfolios such as RMDs not required in 2020 and year-end retirement plan contribution limits. This was too self-explanatory. Then it dawned on me! How did I overlook this? The biggest news story (other than COVID-19) of 2020, MURDER HORNETS arriving in the US! Upon diving into this incredible news that could alter American lives for decades to come it became evident that these “predators” are more of a threat to the native honeybee population and less of a threat to you and I. Feeling dejected and running out of time to find a topic, I decided the recent presidential election may be of interest to some of our clients and what we believe this means for investors and their portfolios.
I will dive right into the more noteworthy takeaways from the election:
- Expect increased market volatility in the wake of the election
- Republicans likely to retain control of the Senate, resulting in split Congress. Historically, an outcome that results in higher market returns
- Despite the uncertainty (which is the only noun you can use to sum up 2020), investors should remember that company earnings, not elections, drive the stock market
After a record voter turnout in 2020, we ended election day Tuesday, November 3rd with no clear winner of the US presidency. As many waited for states to total ballots it was not until Saturday, November 7th, that former Vice President Biden’s campaign proclaimed victory. These results are yet to be acknowledged by President Trump’s campaign and could continue to be disputed into the upcoming weeks (1). With an unclear feeling left after the election, we expect volatility to increase as lawsuits in contested swing states emerge. The saying goes uncertainty leads to volatility. But what exactly is volatility? The word tends to carry a negative air to it when in fact volatility can create both swings in positive and negative returns. Case and point, the S&P 500 through election week traded up five consecutive trading days (November 2nd – November 6th) ending the week up 213.24 points or +6.47% (2). Any investor who moved out of equities in fear of negative volatility caused by the election missed out on almost a years’ worth of returns. As I write this on Tuesday, November 10th, the S&P 500 Index closed at 3,545.53 (2), just 35.31 points shy of its all-time closing high recorded earlier this Fall on September 2nd. In addition to stocks climbing higher amid the uncertainty, Wednesday after the election, treasuries also rallied, on the view that a split government would curb hopes for a large fiscal stimulus package. Near-term, we continue to expect bond-yields and inflation to remain low as the Federal Reserve attempts to breathe life back into the economy.
Split Congress and Equity Markets
In other election races decided last week, it now appears likely that Republicans will hold a majority in the U.S. Senate, while Democrats will maintain control of the House of Representatives, resulting in a split Congress. That has been the case since the 2018 midterm elections when Republicans lost the House. Coincidentally, markets have performed best under a split Congress with the S&P 500 Index returning on average 10.4% annually (1933-2019). This is significantly higher than annual historical returns under a Unified Congress of 7.4% (3). We also expect taxes unlikely to increase in the next two years with a divided government and a much smaller economic stimulus package to pass than the discussed $2.2 trillion deal the House passed in early October (4). Throughout history, markets have been able to power through contested presidential elections, deadly pandemics, and economic recessions — usually not within the same year — but they have powered through, nonetheless.
Companies Not Elections
Whether a Democrat or a Republican occupies the White House has made little difference to overall long-term investment returns. “The near-term performance of the economy and the markets may have played a role in this election but, realistically speaking, presidents get far too much credit and far too much blame for what is happening in the economy and the markets,” says Capital Group economist Darrell Spence. “For the most part, the dynamics that contribute to economic growth and market returns are put in place long before the election and they remain long afterward. “As investors, we try to focus on the underlying fundamentals that are driving the economy and corporate profitability,” Spence notes. “That often has very little to do with who happens to win an election (5).” Despite extreme volatility during the year, U.S. equity markets have trended upward. On a year-to-date basis through November 10th, the S&P 500 Index gained 9.3% (2) as technology and consumer-tech stocks rallied amid the lockdowns. We anticipate this to continue with current P/E ratios above historical averages which we see as good for growth stocks to continue to outpace value stocks near-term. We also expect US stocks to continue to outperform International stocks with Emerging Markets leading Developed Markets internationally.
Returning to the election, the economy and the coronavirus outbreak were the top two issues in the presidential contest, according to most polls (1). Trump was generally viewed unfavorably for his handling of the pandemic, while voters gave him higher marks for his economic policies (1). The U.S. fell into a recession earlier this year, as government-imposed lockdowns brought economic activity to a near standstill. However, in the most recent measure of U.S. economic activity, U.S. GDP growth came back, rising at a record 32.1% annual rate (6), benefiting from constrained consumer demand and government stimulus measures. A key driver has been U.S. home sales, which have benefited from rising demand and historically low mortgage rates.
Every four years the US presidential election and political divide that accompanies it draws on our deepest and strongest emotions. This year it has undoubtedly been magnified with the coronavirus pandemic, social unrest, and economic shutdowns cast upon us all in the span of about 10 months. Investment decisions that are driven by emotion historically have led to underperformance in the equity markets. We understand these feelings of needing to respond are hard to ignore and is the reason we strive to base our investment decisions off things within your control such as your accumulation goals, risk tolerance, investment timeframe and financial objectives. These do not change month-to-month and cannot be measured within a market cycle, but instead over a lifetime. The investors that understand this and allow the markets to run their course, are and have been, the ones historically able to build and increase their wealth not only for their lifetime but for generations to come.
Wishing everyone a safe and happy holiday season,
Jon Launder, CFP®
- Yahoo Finance, S&P 500 Historical Data
- Capital Group, Strategas 12/31/2019
- Washington Post – Economic Policy/2020/10-1
- Capital Group Capital Ideas
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.