Although third quarter markets continued to be upbeat, the overall news was not as bright. Unemployment is over 8 percent, the federal deficit as a percentage of GDP is the largest since World War II, 210,000 plus American lives have been lost due to Covid-19 and the election is one month away. How do investors respond to all the uncertainty?
During election years investors have the tendency to add volatility to the markets by selling on the latest political polls or economic data. This is referred to as the recency bias, where investors take the most recent information and give it more weight than long-term data. Investors tend to find information from various sources that support their opinions while ignoring contrary information. This is called the confirmation bias. The chart below demonstrates how voters and investors may be overthinking potential outcomes:
It may be a surprise to know that over the last 85 years there have been seven Democratic and seven Republican presidents. The chart illustrates that the S & P 500 long-term investment returns show essentially no political difference.
We have all heard that it is best not to talk politics with family and friends, so we will refrain from doing so. Politics aside, corporate executives adjust to changing tax laws and policies delivered by whichever party or mix of government is serving in Congress or the White House. We know that neither incumbents nor the newly elected accomplish few of their policy agendas at best.
Some of the concerns expressed by clients in recent conversations are illustrated in this next chart. No matter what our government looks like post-election there is, over time, a positive outcome. This shows that, independent of political uncertainty, market returns trend upward on average.
Investors, during periods of heightened emotions, can act irrationally at times. Look back at where you were at the beginning of the year, how the market sell-off at March end affected your portfolio, and where you are today. Remarkable, but not unusual. This tells us that our portfolios are not political but rather company specific. A diversified portfolio will hold a diverse cross-section of all markets both domestic and international. As the pandemic hit hard in the U.S. it immediately affected certain industries and likewise lifted others to thrive. In a nutshell, that is deemed balance. It is almost magical. As various sectors of the global markets are sinking, such as travel, entertainment, and hospitality, other sectors are booming - technology, home delivery services and some manufacturing. We sometimes forget that the most important ingredient for economies to thrive is the consumer. Consumers are resilient and never completely go away.
We are aware that consumers have temporarily hit the pause button due to the pandemic, not because consumers don’t want to spend, but rather because they are being held back. According to Dirk Hofschire, senior vice president of asset allocation research at Fidelity, the most recent information says the economy is in the early phase of the business cycle. “Household and corporate spending has improved as the economy has been reopening, albeit fitfully, with support from extraordinary fiscal and monetary policy.” Our economy is slowly showing signs of life even though we are still amid the pandemic.
Although the markets may have priced in new Covid-19 treatments and vaccines on the horizon, it is the best news for all. We are certainly not through this pandemic nor have we completely realized the lingering effects as we begin to heal from this deadly virus, but we will prevail. Life will be different as we adjust to the effects of Covid-19. Some things will be permanently changed, and others will become the new normal. We have adjusted to obstacles before and we will do it again because we are resilient.
We continue to evaluate the overall asset allocations and have begun taking some profits to shift to other areas of investing that are presenting opportunities beyond Covid-19. As Warren Buffet said, “Do not take yearly results too seriously. Instead, focus on four or five-year averages." We are always looking out five years and beyond. Diversification accounts for uncertainty in your asset allocation.
We believe that to be successful through all cycles of investing, investors need to take a long-term view of the markets. If your asset allocation is well-balanced and aligned properly with your short, intermediate, and long-term goals, you should be positioned to weather any storm. Do not let your emotions of fear and anxiety derail your positive outcome over time. Stay the course as the election approaches and reach out to us to discuss any concerns.Thomas L. Menzel, CFP® Laura Biermann, CFP®President Vice President
IMPORTANT DISCLOSURES: The opinions presented in this communication are subject to change without notice and no representation is made concerning actual future performance of the markets or economy. Information obtained from sources is considered reliable but is not verified. The research and other information provided herein speak only as of its date. We have not undertaken and will not undertake any duty to update the research or information or otherwise advise you of changes in the research or information. Performance information presented is not an indication of future results and index data is provided for market reference purposes only. This is not an offer to buy or sell or the solicitation of an offer to buy or sell any security/instrument or to participate in any particular trading strategy. This document is the property of Legacy Financial Advisors and is intended solely for the use of the Legacy client, individual, or entity to which is addressed. This document may not be reproduced in any manner or re-distributed by any means to any person without the express consent of Legacy. This material is for educational purposes only. Mis-transmission is not intended to waive confidentiality or privilege.