The other day I was talking to a friend who was concerned about how the elections might impact her portfolio going forward. She wanted to know whether I had a prescribed “course of action”.
This is a legitimate question. When times are uncertain we long for stability. Sometimes the decisions we make in such conditions are well founded and beneficial, and of course, sometimes they are hasty and end up being harmful. Determining whether a particular game plan is of the helpful or harmful variety is what’s hard – and why my friend was looking for some perspective.
Before the COVID-19 pandemic began, the economy had been strongly assisted by reduced taxes and regulations on public corporations. These actions improved the bottom line for many of those companies, at once boosting corporate earnings and increasing the value of their shares. This led to stock markets hitting new highs and investors – shareholders – reaping the rewards.
Then, everything changed as the world reacted to this new virus.
Like a lot of other people, I had plans for this year. Since late 2019, we had been planning a family reunion for Thanksgiving that would have had many members of the Stewart family aboard a cruise in the sunshine for an entire week. The logistics involved in managing that many people were significant. Of course, the cruise was ultimately cancelled.
During the first half of 2020 year we were still harboring small but insistent hope that this might actually still work out. I share this knowing that many families have experienced very real hardship throughout this year, most of which being far worse than a cancelled vacation. No matter how large or small the impact, this year has been stressful for everyone.
12 months ago, if you had told me that we would be experiencing a pandemic in 2020 that saw the literal closure of our economy, with the accompanying instability, and high unemployment this has created, I would not have guessed that the stock market would be hitting new highs.
Yet that is (after the initial drop in March) what we’ve seen this year. The policies that were put in place before the pandemic – that boosted earnings for companies – have remained in place, and have continued to be favorable for investors.
Now, in the midst of this, we have an election happening in very short order. There is a lot of fear among some that a change of control could result in a reversal of fortune for companies that have enjoyed lower taxes and less regulation. Given the positive results those policies have created for investors, the possibility of the opposite occurring creates concern.
So back to the question: What is the best course of action now, a few days before the election?
By now you should know that I am always going to come back to the data. What does the available information tell us? In short, the data on this shows that generally the market will start to weaken going into an election, but that weakness will start months – not weeks or days – in advance. Once the market starts to feel like it has a handle on who the eventual winner will be, it tends to bottom out. By and large, most of any damage that may occur due to election uncertainty is over well before election day.
That said, if you were of a mind to liquidate your portfolio ahead of an ambiguous election date, you’d really want to have taken that action 6 to 9 months ahead of that election. Of course, if you’d taken that course this year, you would have missed out on some impressive rallies and opportunities for increase.
Making great decisions at any point in time is difficult at best, and in 2020, this can feel even more the case. Yes, we’ve not had this specific experience in the past, but that doesn’t mean we don’t have significant data to rely on.
So, even when our hearts and minds are colluding to push us towards action based on fear (or hope) – and let’s face it everyone’s hearts and minds do exactly that – we are most often better off with a little discipline… whether during pandemics, financial crisis, elections, or any other type of serious market turbulence we may experience throughout our investing lifetimes.
~ Greg Stewart, CIO