Message from Jon
First off, I am sorry for the last week's issue not being delivered! I failed to click the send button on the system to put it in the queue. With it being rebalancing week and end of earnings week, this mistake slipped by us unknowingly.
Biden Strongly Considered
We think that Wall Street is now firmly pricing in a Biden Election win. We are seeing confirming evidence to this effect as well with the VIX declining and the indexes responding sharply upward despite the continued problem with Congress not being able to pass a stimulus bill yet. In doing more research over the weekend, I revisited Dr. Alan Lichtman's 13 keys system where the prediction is firmly in the Biden Camp as well.5
For those of you that are unfamiliar with Dr. Lichtman's system, I first spoke about it in 2016 where he was predicting a Trump Election. His system was developed in 1984 and involves 13 keys to winning the Presidential Election.4
He has predicted the last 9 presidents, and what's more interesting is that the keys do not involve the debates, the campaign strength or the Polls, Opinions or Popular Votes. What it fails to consider is the "suppression of the minority vote and sad to say, Russian intervention" this time around.
- Party Mandate: After the midterm elections, the incumbent party holds more seats in the U.S. House of Representatives than after the previous midterm elections. False.
- Contest: There is no serious contest for the incumbent party nomination. True.
- Incumbency: The incumbent party candidate is the sitting president. True.
- Third party: There is no significant third party or independent campaign. True.
- Short-term economy: The economy is not in recession during the election campaign. False.
- Long-term economy: Real per capita economic growth during the term equals or exceeds mean growth during the previous two terms. False.
- Policy change: The incumbent administration affects major changes in national policy. True.
- Social unrest: There is no sustained social unrest during the term. False.
- Scandal: The incumbent administration is untainted by major scandal. False.
- Foreign/military failure: The incumbent administration suffers no major failure in foreign or military affairs. True.
- Foreign/military success: The incumbent administration achieves a major success in foreign or military affairs. False.
- Incumbent (party) charisma: The incumbent party candidate is charismatic or a national hero. False.
- Challenger (party) charisma: The challenging party candidate is not charismatic or a national hero. True.
What would a Biden victory possibly mean for Wall Street?
Well, in our opinion, with a Biden win, we could possibly see a positive turn in terms of additional Stimulus from Congress. We could see a potential sell-off be overshadowed by the stimulus package, giving way to either a continuation of the rebound or a muted sell-off while the market processes the stimulus.
The tax bill is likely to punish high wage earners, corporations and capital gains. The bill, while not taking place very quickly, may prompt hedge funds, mutual funds, endowments and foundations alongside retail investors to take profit off the table at lower capital gains rates while preparing for higher rates in the future. If enacted, this bill will likely trim off about 10% of the earnings of the S&P 500 resulting in a potential view of being overvalued. This could possibly stall investment and cause a reversal of fortune in the short term. When done in mass, we may have to live through another 4th quarter of 2018 all over again. Worry will get you nowhere though, especially if we see another rebound like we did in 1st quarter of 2019.
History does not support sentiment
Reacting to this by selling is a bad idea, in our opinion. Despite your personal politics or biases, the markets do better on known monetary policy, federal stimulus and profitable economies.
There is a big difference between what is perceived and what is reality, especially in today's world of fake news, or at best, biased information. According to Blackrock, the stocks' average returns from years 1928-2019 is 11.3% while bonds are 5.5%. "It's the Economy stupid!" is the famous quote by James Carville.1
It's interesting that the majority of voters seem to be unhappy with how the President has handled the COVID-19 pandemic, and since it was the pandemic that stunned and debilitated the personal economies of many in the US, it would make sense that this quote still applies even though indirectly this time around.
Since 1926, open election years have produced a 2.5% average return, while presidential re-election years have returned 10.3%. Even though the history indicates a positive market return, the experience may prove to be disturbing and distressing to many! 2
Will we shift?
Yes, we will be shifting portfolios but not necessarily for the obvious reasons. We will be looking at what will likely be faring well in 2021 with a new Democratic leadership. We will be using the end of year to rebalance portfolios. Historically, if you compare a periodic rebalance with a buy and hold, the numbers favor a rebalanced approach. We will still be conducting our Best Of Breed Selection Process though, since this has gotten more effective with the additional scrutiny from our CFA.
We will not be looking to avoid the raindrops in a thunderstorm since it is impossible to time the markets. We are, however, ensuring that our systems and strategies remain in alignment with what is happening on Wall Street and in our economy. Tilting in favor of, or away from, is a stronger way to manage risk than an all-in vs all out approach, in our opinion.
Could Trump still win?
Of course, the President could still win. At this point, anything is possible, but few outcomes are probable in our opinion. We are bracing for an elongated period of time where the results are being contested. We are preparing for an increased amount of violence and volatility to unfold on Wall Street while keeping in mind that this is all short-term in nature, while our clients and prospective clients are in it for the long-term.
2021 will be here before we know it and with it will come new challenges and opportunities. We will meet those with success when we stick to your plan and focus on what matters most-which is not returns. It is getting account values to where they need to be, eliminating debt as early as possible when it enhances your goals, and making sure you either get a plan or stay on your plan going forward. Stay focused to stay on course!
Till we speak again, enjoy the turning of the leaves!
Stocks Rise, Stimulus Uncertain
WEEKLY UPDATE - OCTOBER 12, 2020
The Week on Wall StreetStocks staged a powerful rally last week, riding a wave of optimism over the prospect of the passage of a new fiscal stimulus bill. The Dow Jones Industrial Average rose 3.27%, while the Standard & Poor's 500 increased 3.84%. The Nasdaq Composite index gained 4.56% for the week. The MSCI EAFE index, which tracks developed overseas stock markets, advanced 2.23%.