When It Comes to the Markets, Ignore Temporary Drama and Focus on the Long-Term

 

By Judy Loy, Registered Investment Advisor, ChFC® and CEO of Nestlerode & Loy, Inc.

2020 is a year that just keeps on giving: a pandemic, social unrest, an election year, the death of Eddie Van Halen (tough one for a girl that grew up in the ‘80s) and Penn State football without fans or tailgating. 

With all the disruption and uncertainty, the markets took a tumble in March. The S&P 500 took its four largest one-day point drops ever in March 2020. This coincided with the World Health Organization declaring COVID-19 a pandemic. The stock markets hit their low point on March 23 and the low point in the economy came in April. As always, the stock market is forward looking and a leading indicator.

With all the uncertainty, what are people most concerned about with their portfolios? Two words: the election. 

Certainly, the president of the United States is an important role and this year’s race is bringing intense feelings on both sides. How important is it to our economy and the markets?

When looking back at the past 23 elections, no political party has been completely bad or good for the U.S. stock market. In other words, when viewing your portfolio, step away from the drama. Put your attention on three things:  the economic cycle, corporate profit trends and Federal Reserve policy. Capital markets are not intricately linked to politics for the medium and long-term, which is the time frame for investing in equities.

In the last 12 cycles, the markets have had positive returns three months before and three months after an election. A fear relayed often is that the election will not be decided on Nov. 3 due to delayed mail-in voting. The reality is the market knows this so this would not be a surprise. In 2000, we faced litigation (remember the “hanging chad”) and a contested election between Al Gore and George W. Bush. As this was unexpected, the market fell 12%. As with anything — pandemic, election, etc. — this too shall pass.  In addition, this came at the end of the tech bubble, so many stocks were overpriced at the time. 

With all the headwinds the U.S. market is facing, what can go right? The U.S. economy is recovering and is anticipated to recover fully by year-end 2021. Fiscal and monetary policy is and will be accommodative. This means that the government and the Federal Reserve are both looking for ways to stimulate the economy. The Federal Reserve has committed to not raising rates for at least three years and the government (monetary policy) is trying to get a new stimulus package passed.

The final rescue for the markets is the U.S. consumer. That’s you and I. We are the lifeblood of the American economy, providing two-thirds of economic GDP. There is good news here, too. Consumer confidence is increasing, and small businesses are more positive. Small business is important as the leading employer in the United States. Consumers have been saving and have lots of cash and improved balance sheets. The U.S. consumer balance sheet is at the best level in decades so when things return to “normal” demand may be strong. 

The best advice I can give is to think long-term and ignore the drama, be it election drama or not. The markets are always looking toward the future and the pandemic and election are temporary — even if sometimes they don’t feel that way.