Welcome to the 4th quarter 2020.
It seems we are entering crazy season. Crazy with a capital C.
After watching the first presidential debate, it’s clear that the country is divided. Unfortunately, politics have devolved into a circus-like atmosphere – this at a time when our nation desperately needs direction, not drama.
No matter which way you personally lean, frustrations are building going into the election. The reason I am stating the obvious here is that we need to acknowledge the obvious –that these feelings may be creeping into our framing of near-term risks and by extension, our feelings about the market and our investments.
As investment and advisory professionals, we at BSW Wealth Partners are not immune to this dynamic. However, through experience, a foundation of truth over fiction, an ethos of investment over speculation and a thoughtful approach to risk management; we both acknowledge and divorce these natural human feelings from our number one purpose – to help our clients towards achieving their financial and life goals.
All of that is not to say we are turning a blind eye to the perceived risks that are currently front and center. Rather, BSW is trying to dig through the rhetoric, Tweets, conspiracy theories, issues, and policies to parse out what we feel is most germane to the investment landscape.
Potential influences on the market
Here is what we see as some of the more probable near-term risks. You will notice that, fortunately, most are paired with an accompanying opportunity!
Risk 1: Due to the unprecedented expected number of mail-in ballots, we may not have a confirmed POTUS on election night. As we all know, the market hates uncertainty.
Opportunity 1: During the undecided Gore v. Bush election in 2000, when the U.S. did not have a confirmed president for 36 days, the S&P 500 fell ~8% at its worst point. Should something similar occur this year, BSW sees this as a potential opportunity to buy stocks at lower prices. These types of market pullbacks are generally temporary in nature and tend to snap back once a POTUS has been confirmed. We have dry powder in client portfolios in the form of liquid, fixed income mutual funds that enable us to be nimble when the moment presents itself. This dry powder was built up through selling stocks at higher prices (part of BSW’s disciplined rebalancing process) across client portfolios in early September of this year.
Risk 2: The market might get very volatile leading up to the election.
Opportunity 2: BSW is looking to take advantage of this in a few ways. We expect the U.S. dollar to potentially weaken if global investors perceive near-term risks within U.S. investments. BSW’s healthy exposure to foreign stocks within client portfolios should benefit in this scenario, as overseas profits get translated back to USD at more favorable rates.
BSW’s stable of active managers seem to have navigated this year brilliantly – meaningfully outperforming their respective benchmarks year- to-date. We would expect that with any temporary dislocation, their intentional tilts away from the indices would continue to be beneficial.
Risk 3: If Biden wins, both corporate and individual taxes will go up, potentially scuttling the stock market’s rise off the March low.
Opportunity 3: Yes, higher taxes diminish corporate earnings available for stockholders, but what those taxes fund and potentially stimulate also matters. Many of our clients hold municipal bonds as the core of their portfolios. We would expect muni bonds to do very well in a higher tax environment. If tax rates go up, tax free bonds will become relatively more attractive.
Lastly, I would highlight the fact that no matter what happens with the election, the market is being controlled by the strings of a much bigger puppeteer. The U.S. has recently made the transition from purely monetary stimulus to monetary AND fiscal stimulus.
Monetary stimulus, or the printing of money, effectively lowers interest rates. It makes borrowing more affordable for things like homes and cars and makes stocks relatively more attractive than bonds. However, it is indirect stimulus. The Fed cannot make people borrow more money and spend. It not only is impractical to keep borrowing, it is not feasible for most – no matter how low the interest rate on the loan.
How the election might affect you financially
Fiscal stimulus on the other hand, puts cash into consumers hands to spend how they wish. The recent CARES Act stimulus gave the unemployed an extra $600/week and in many cases provided a onetime payment of $1,200. This stimulus is direct and typically translates to money flowing right back out into the economy. The market understands that this is powerful stuff. It’s why the S&P 500 tumbled 2% in the last hour of trading on October 6th when Trump Tweeted that fiscal stimulus talks were to be called off. It’s also why the market then turned right back around and rallied almost 2% the following day when Trump Tweeted that more stimulus in the form of direct payments are needed.
BSW’s base case scenario is that some form of further fiscal stimulus is likely on the way – especially if daily COVID infection counts continue to rise into the Autumn. With all this back and forth, the puppet at the end of these strings may be getting tangled. If the government hither and thither goes on for too much longer, we risk a tangled knot that will be difficult to untie.
At the end of the day, this election marks the culmination of years (if not decades) of pent-up opposing viewpoints, which have been stewed to a boil within a pandemic and served through a social media pipeline that propagates untruths and narrow-minded thinking. This makes for unbelievable theatrics and headlines, but from a portfolio standpoint, the boring, tried and true investing principals that historically work over the long-term are what ground us in what is important. While others are day trading Tweet-induced market swings on apps like Robinhood, BSW adheres to remaining diversified, managing risk, and trusting all-weather, client-specific asset allocations.
The bottom line for your portfolio
Since most of us aren’t attending crowded events in person just yet, enjoy this circus from the comfort of your couch. BSW is here to help ensure your portfolio is on the right track and provides a sense of calm confidence in these tumultuous times.