October 2020

Investment Commentary

As we enter the Fall season this year, we are not only greeted with the usual cool weather and holiday planning but also the barrage of political ads, news reports, and unsolicited social media posts regarding the upcoming presidential election. During these unusual times we are reminded of Yogi Berra’s comical quote that “the future is not what it used to be.” And that is no doubt how many of us feel as we witness social tension and political polarization in the country. However, as investors it is often the best course of action to reflect upon history to provide some clarity to how the stock market has reacted to previous presidential elections. From a historical perspective, there are three important take-aways:

  • Decreasing Value & Increasing Volatility:Historically, volatility, or stock price fluctuations, increase during the October of presidential election years. Typically, this volatility quickly dissipates after the election but currently investors are assuming that the 2020 election results may not be known until later in November. Additionally, we know that the stock market does drop during the election season, but not by as much as many voters may expect. For example, between September and November during election years, stocks typically drop an average of 2%.
  • Predictions Are Often Problematic: The stories that both Republicans and Democrats tell about a president or presidential candidate are not often reflective of the data. For example, President Carter (Democrat) was said to be bad for jobs when job growth accelerated above trend during his presidency. Additionally, President Reagan’s (Republican) policies were meant to only benefit the rich when we actually saw median weekly wages outpace the trend during his presidency. This is all to say that as voters we are not always able to accurately predict what the future will bring in large part because the economy and stock market are effected by a plethora of factors…only one of which is the president’s agenda.
  • Disliking the President is Good for Your Portfolio: There is an interesting phenomenon that when the disapproval rating for the president is highest, it is often the best time to invest. This is because the approval rating is often tied to the economy and when we have a recession and unemployment rises, the president is often blamed. This also happens to be when the Federal Reserve is likely to intervene by printing money and decreasing interest rates (as we saw back in 2008 and now again in 2020). Since lower interest rates are positive for the stock market, investors tend to enjoy nice growth in their portfolios over the next several months/years.

For investors that are risk-averse or currently in retirement, the above focus on the upcoming election is very relevant as there may be a lot of volatility in the next few months. Now is the time to ensure that your portfolio’s allocation aligns with your focus on income and preservation of capital. Longer term investors, however, can and should remain focused on investment themes that will be more important in the coming years rather than just focusing on the coming months. We believe the role of technology and the expectation of inflation should continue to be analyzed:

  • The Role of Technology: As we have noted in our previous newsletters, five companies (Google, Microsoft, Amazon, Apple, and Facebook) now account for close to 20% of the stock market’s value. This overconcentration is concerning for two reasons. First, the market is more susceptible to a pull back if any one of these companies are associated with bad news. Second, as these companies continue growing their market share and revenue, they will continue to receive scrutiny from Washington. These companies’ growth has not gone unnoticed. In fact, Congress’ Antitrust Subcommittee has recently released a 449-page report that urges the government to aggressively regulate their behavior to prevent them from crushing competition.
    • Investment Consequence:Unfortunately, in the current economic environment there are few companies that are as attractive as these technology leaders from a revenue growth perspective. As a result, it may make sense to maintain an investment in these stocks but reduce your position to “take some profit off the table.” We would encourage you to further diversify during this time.
  • Expectation of Inflation: Some investors are worried that as the government continues printing trillions of dollars, inflation will start to rise. This makes sense since if you give people more money, you would expect them to use it to buy more goods. The higher demand for products and services would then lead companies to increase their prices (i.e. inflation). However, in the short term we do not see this scenario occurring for three main reasons. First, unemployment remains over 7% higher than it was back in February before COVID-19. When people do not have jobs, they do not spend as much. Second, we have an aging population with baby boomers continuing to enter retirement. In retirement people save more of their surplus cash rather than spend it. Third, technology continues to minimize workers’ power to demand wage raises. With slower rising wages, people spend less. These three trends point to little inflation in the short term. In the long run, however, there will be a rising risk that the trillions of dollars the government has printed begins to circulate and inflate prices.
    • Investment Consequence:While no one can accurately predict if, when, and how extreme any future inflation will be, it is fair to say that many assets that provide protection against inflation are cheap right now. As a result, adding a small amount of these assets to your portfolio may not cost much and will provide significant protection in the future. Real estate, TIPS (Treasury Inflation-Protected Securities), and consumer staple stocks tend to perform well during inflationary periods.

As the world continues to change, we still believe the stock market remains the best option for investors compared to their alternatives which is one reason it continues rising. Long-term investors need to maintain their exposure to stocks over the next several years if they want to achieve attractive returns in this low-interest rate environment.

 

Wishing you a safe and healthy last few months of 2020.

 

The Glen Eagle Investment Team

Disclosure: This commentary is furnished for the use of Glen Eagle Advisors, LLC, Glen Eagle Wealth, LLC and their clients. It does not constitute the provision of investment advice to any person. It is not prepared with respect to the specific objectives, financial situation or particular needs of any specific person. Investors reading this commentary should consult with their Glen Eagle representative regarding the appropriateness of investing in any securities or adapting any investment strategies discussed or recommended in this commentary.