Will The Elections Impact Our V-Shaped Recovery?

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I always enjoy this time of year when Central Oregon takes a deep breath after a busy summer and before the feverish holiday and ski season. This year has certainly not been the norm and there are so many moving parts impacting the economy and the markets — it’s challenging of knowing where to begin with this quarter’s commentary. However, in this brief article I’ll summarize the recent markets activity as well as share thoughts on the potential impact that the election and Federal Reserve may have on the markets and ask the question whether the V-shaped recovery continue into 2021? 

The Markets in Review

The worst of the 2020 Coronavirus bear market took place in February-March. When trillions of dollars of fiscal and monetary support were announced, sentiment shifted quickly in the spring and stock indexes staged a very strong recovery. This continued into Q3, as Large Cap U.S. stocks reached new all-time highs and many other stock market measures retraced much of the losses incurred during Q1.

Although not as strong as Q2, the market gains for Q3 were very good. The Q2-Q3 rally was driven primarily by a massive government fiscal and monetary response, positive trends in new COVID cases, and hopeful news about vaccines and treatments. These factors allowed investors to look past the steep Q1 recession and envision an economic and earnings recovery as global economies reopened. Let’s take a look at how some of the major asset classes have performed over the last quarter: 

  • U.S. large cap stocks continued to perform well in Q3, as the S&P 500 was +8.9 percent. 
  • In a major reversal, international equities (aided by a drop in the value of the U.S. Dollar) did well, as MSCI Emerging Markets gained +9.6 percent and MSCI EAFE was +4.8 percent.
  • The other domestic equity indexes had solid results, with S&P 500 Value +4.8 percent, S&P Midcap +4.8 percent percent and S&P Smallcap +3.2 percent. 
  • REITS were positive as the MSCI World Real Estate Index was +2.1 percent. 
  • Only the S&P Natural Resources index lost ground at -7.6 percent as the energy sector was particularly weak. 

Yes, Q2-Q3 returns were strong, but not strong enough to offset the steep Q1 losses, so most of the equity sectors remained in negative territory YTD however the S&P 500 regained positive status at +5.6 percent. Here’s where the others are YTD:

  • The MSCI Emerging Markets -1.2 percent 
  • MSCI EAFE (developed international) -7.1 percent 
  • S&P Midcap -8.6 percent 
  • S&P Smallcap -15.2 percent 
  • S&P 500 Value -11.5 percent remained well below their pre-COVID trading ranges. 
  • As is often the case during times of sharp stock market gains, fixed income returns lagged the stock markets in Q3. 

The Election and The Markets:

U.S. Presidential and Congressional Elections Election Day is closing in and will have taken place by the time you read this article. Everyone seems to be pondering the impact the national elections will have on the markets. The U.S. election is taking place against a historic backdrop of hyper partisanship, pandemic, recession and civil unrest. The outcome could have significant implications for key policy areas including fiscal stimulus, public investment, taxation, regulation and foreign affairs. One way to try to factor in the impact of elections is to consider which party controls not only the White House, but also Congress. Historically, the best backdrop for stocks is a split government whereby the President’s party does not have majorities in both the Senate and the House (source: Fidelity, Presidential Elections & Stock Returns). Basically, investors seem to prefer the checks and balances of even a highly partisan sharing of power versus an unchecked one-party situation. Unfortunately, Election Day 2020 is uncertain, and the uncertainty only increases from that point forward. We do not know whether there will be a Blue sweep or a Red sweep or a continuation of split government. Due to the pandemic and the vast number of mail-in ballots that must be counted, we may not even know who the winner is for days or weeks after November 3. Market volatility seems likely to remain at high levels over the remainder of 2020. 

Federal Reserve Board Policies 

After a significant review, the Fed released its updated Statement on Longer-Run Goals and Monetary Policy in August 2020. A key update within this statement is: In order to anchor longer-term inflation expectations at this level, the committee seeks to achieve inflation that averages two percent over time, and therefore judges that, following periods when inflation has been running persistently below two percent, appropriate monetary policy will likely aim to achieve inflation moderately above two percent for some time. In a nutshell, this update means the Fed is likely to keep interest rates low, even if inflation creeps above two percent. Fed Chair Jerome Powell called this strategy, “a flexible form of average inflation targeting.” It has implications for inflation expectations, interest rate expectations, and numerous other economic and market metrics. This statement will be reviewed in five years, which means the base case for the next five years is that interest rates should be expected to remain very low and inflation will be allowed to rise. We know the Fed has been unsuccessfully trying to goose inflation up for several years but factors beyond their control have kept inflation declining. Adding in the Fed’s plan to more-or-less ignore the possible inflationary impacts of extremely low unemployment indicates the Fed is more likely to let economic recoveries run, instead of using levels near maximum employment as an excuse to raise interest rates. As with most significant Fed Policy shifts, there will likely be unintended consequences as this revised policy plays out in coming years. 

Can the V-shaped recovery continue into 2021? 

There is little doubt that increased liquidity, brought on by the expanded money supply, has assisted in the V-shaped stock market recovery. Likewise, low taxes and low interest rates are often used as justifications for higher multiples. For this stock market rally to continue, the economy must grow steadily next year and drive earnings higher. I am concerned that the path to recovery for the economy is not as clear as the immediate feedback we are getting from stocks. The economic recovery is filling in the outline of a “V”, but significant questions remain. If history repeats, we should see some of the initial snapback economic numbers moderate in their intensity. An important headwind for rapid economic recovery is that investors and the public are coming to terms with the likelihood that additional stimulus money may not be forthcoming. The political parties are far apart in their plans for providing more funds as Washington is paralyzed by political partisanship. Nearly 26 million workers were still receiving some form of unemployment insurance through early September, telling us that a great many households cannot feel economically secure. It is essential that the general momentum of the economic recovery continues, or stock prices likely will be affected. 

Many people feel uneasy with so much uncertainty — much of which is completely out of our control. I believe we create the destiny for both our lives and our business. I suggest we do our best to focus on the opportunities, block out the fear and make things happen. Lead with optimism. Mark Twain stated, “My life has been full of many terrible misfortunes — most of which has never happened.”

David Rosell is president of Rosell Wealth Management in Bend. RosellWealthManagement.com. He is the creator of Recession-Proof Your Retirement Podcast and author of Failure is Not an Option — Creating Certainty in the Uncertainty of Retirement and Keep Climbing — A Millennial’s Guide to Financial Planning. Find Rosell’s books on Audible and iBooks as well as Amazon.com and Barnes & Noble. Locally, they can be found at Newport Market, Sintra Restaurant, Bluebird Coffee Shop, Dudley’s Bookshop, Roundabout Books and Sunriver Resort.

Source: “TOPS 3rd Quarter 2020 Market Commentary.” The material contained is for informational purposes only and is not intended to provide specific advice or recommendations for any individual nor does it take into account the particular investment objectives, financial situation or needs of individual investors. The information provided has been derived from sources believed to be reliable, but is not guaranteed as to accuracy and does not purport to be a complete analysis of the material discussed, nor does it constitute an offer or a solicitation of an offer to buy any securities, products or services mentioned. Past performance is not indicative of future results. Diversification cannot assure profit or guarantee against loss. Performance of an index is not illustrative of any particular investment. It is not possible to invest directly in an index.

Investment advisory services offered through Valmark Advisers, Inc. an SEC Registered Investment Advisor Securities offered through Valmark Securities, Inc. Member FINRA, SIPC 130 Springside Drive, Ste. 300 Akron, Ohio 44333-2431. 800-765-5201. Rosell Wealth Management is a separate entity from Valmark Securities, Inc. and Valmark Advisers, Inc.

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About Author

David Rosell of Rosell Wealth Mangement

David Rosell is president of Rosell Wealth Management in Bend. He is the author of Failure is Not an Option- Creating Certainty in the Uncertainty of Retirement. You may learn more about his book at www.DavidRosell.com or Amazon.com. Ask for David's book at Costco, Barnes & Noble and in Bend at Newport Market, Cafe Sintra, Bluebird Coffee Shop and Powell's Books in Portland.

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