October 2020 Script
Hi everyone and welcome to another CG Insights! It’s been a pretty interesting few weeks with volatile markets and the election rhetoric really heating up. On that point: how would a political change impact your financial strategy? In short, we don’t think by much. Using history as a guide, short term fluctuations happen around election time but the economy and companies always seem to find a way to make money no matter which party’s in power:
If you’ve followed our prior videos, you know that we’ve called for more volatile markets as the election gets closer and that’s exactly what we’re getting.
Getting back to the economy for a second, it’s pretty clear the rebound from the COVID shutdowns continues. Jobless claims have slowed, rail car traffic has improved, hotel occupancies are up, and TSA traffic is up. Areas like airlines, cruise ships and theme parks are still having trouble for sure, don’t be surprised to see more layoffs, bankruptcies and doors closing. It’s a very sad situation but it’s not all bad. Some real estate investment firms, for example, are buying dying retail stores and converting them to online distribution centers; big tech companies are doing the same, while others like restaurants are completely reinventing their business models. Many companies say they’ll never return to a full in-office workforce, while others are already back to business as usual. As a result of the COVD disruptions, business are adapting, some faster than they’ve had to before but that’s a very positive development.
These are the themes we’re focused on over the few months:
1) Economic recovery
a. What’s the pace and how do these massive government stimulus packages pan out long term? The uneven pace of recovery likely continues and what does that mean for employment and consumers like you and I?
2) Investing in this environment
a. Rates are still incredibly low, consumers are still pretty strong but the outlook is uncertain. The harsh reality of investing is the outlook is always uncertain, and we’ve faced and overcome many “unprecedented times” before. This isn’t to discount what’s going on but if we had 100% certainty then investing would be easy, but it’s not and that’s why our process includes balance, diversifying and hedging. So if things improve (as we hope) then your strategy can grow, but if we’re wrong and it doesn’t, we have hedges to protect it. And it’s ever-so important to be nimble to adapt (or die as the saying goes); the pace of change has accelerated and shows no sign of slowing down!
b. History shows that earnings tend to double every 10 years for the S&P 500, regardless of political party or drastic economic event. The bright spots have been areas like housing, software, biotech and healthcare for example. That’s somewhat shifted but the key is growth and balance sheets; it’s not the time to chase returns, but also avoid value traps. Just because something looks cheap on paper doesn’t meant there’s a path to rebound. We have to be extra prudent. Yet, we’re seeing great IPOs and risk appetites which are signs of a healthy market.
3) Political environment
a. Last but certainly not least is the potential impact after November’s (maybe late November this year) election results. Affiliations aside, the key areas to us are taxes and regulations. If there is a power change then tax rates could increase, but it will be hard (in our opinion) to argue for big increases in this environment; rates may just go back to where they were a few years ago. The story’s the same with regulations, although crackdowns in the tech sector have been on the docket for a while and could get more air time next year. Going back to the chart we showed at the beginning, longer term trends largely aren’t impacted by election results, just short-term gyrations. There’s always the belief that “this time is different” and it’s hard to argue against that today, but it’s part of our process to factor in political changes to a financial plans. It’s inevitable and we’d be remiss if it wasn’t part of the strategy.
It seems to be even harder to sort through the noise right now but that’s our focus, to not only make sure your assets are safe, but also protected from things like rising inflation and a changing economy. It’s not enough to simply sit in cash and wait for that 100% certainty; it will never come folks! The forces of change continue regardless, just look at the change in the top companies in the S&P 500 just over the past 10+ years:
Source: The Financial Times, Google Finance
Now apply that same concept to assets like real estate, or how much you’ll need to live the work-optional lifestyle in say 2030, 2040 or 2050? Our process is designed to help you put all of the pieces of the financial puzzle together, and establish a strong but flexible plan, so you can spend your time enjoying that lifestyle!
That’s all we have for you today, thanks for joining and we’ll see you the next CG Insights!
i: Source: First Trust Portfolios
ii: Source: Investopedia, data from 1957-2018