Seeing The Forrest
A Pandemic. A stock market collapse. A stock market boom. A recession. Civil unrest. And, let’s add a contentious election cycle to boot. That takes us to the beginning of November; with two months still remaining in 2020. We urge you to read on in hopes some of these insights will help you see the forest amongst the trees.
Elected Officials Always Follow Through With Their Campaign Promises: Stop laughing. We know politics is much more than promises on a campaign trail. There are inevitable roadblocks, lobbying, compromises, and flat out abandoning of promises no matter who is in office. Outcomes rarely reflect the platform that gets officials elected in the first place. We’ll spare you the data.
Pile Into the Obvious Investments Most Likely to Benefit From the Candidate Who is Leading in the Polls: Remember 2016? The polls weren’t so much a leading indicator of the ultimate victor. Again, even if you correctly guess the next president, you are likely going to be less than accurate with regards to the policy outcomes that will play out (see previous paragraph). Not to mention, the sectors that are the most obvious benefactors get pounced on very early as investors jockey to place their bets. Guessing is not a strategy for consistent desired outcomes, no matter how “obvious” things may seem.
Cash Piling Up
Sell Everything Now And Get Back in After We Get the Results: This may seem far fetched, but people have accumulated hoards of cash. This certainly may be a result of many factors: a run up in the markets since April, COVID containment concerns, and increased volatility to name a few. However, we think the uncertainty surrounding the outcome of elections is at the heart of the cash stashing. What if the markets do not respond to the elections negatively? What happens if they do? Is your investment resumption plan emotion-proof? Are you willing to bet your investment portfolio on it? We see no problem in taking profits, or selling collective losers for tax losses and keeping a portion on the sidelines. Especially if it helps you sleep.
It is not all negative news right now. Scientists are getting closer to a viable covid-19 vaccine and have developed much better treatment plans for patients. Governments around the world seem willing to keep piling money into the financial system and interest rates remain low. Even though stocks may seem “expensive” according to their P/E ratio (Price / Earnings), the main alternative is bonds. The Equity Risk Premium of stocks (ERP) which measures the earnings yield of the S&P 500 index minus the yield of the 10 year US Treasury is at a factor around two (2). Historically, anything above 1.5 is good news for stocks.
Volatility Increases Towards Elections - Averages - Election Years 1928-2016
2020 will be one for the history books. It already is! To get you through the elections, just remember that political platforms are for luring voters and rarely result in the outcomes one might expect. Predicting winners and losers of election outcomes is more of a distraction than a wise use of mental capital. And, selling your stocks only to wait to jump back in at the exact perfect time will likely leave you disappointed and even more stressed.
Volatility typically ramps up the closer we get to presidential elections, so if the markets dip, allocate accordingly. If the markets roar ahead, have a plan to rebalance. Have conviction in what you own and how you invest. If your emotions become as volatile as the markets, please reach out to us. Thank you. - JL