For the nation, 2020 has been one of the most difficult years in memory. We are grappling with Covid19 virus and its fallout, economic upheaval, racial tensions, wildfires, hurricanes, a presidential election, and a polarized electorate.
Despite this year’s difficulties, a strong economic recovery, record low interest rates, and an aggressive stance by the Federal Reserve have helped the major market indexes rebound from March’s steep sell-off. However, volatility remains in the market. For the month of October, the Dow Jones Industrial Index fell 6.5%, the S&P 500 Index lost 5.6% and the NASDQ Composite dropped 5.5% (WSJ.com).
But where do we go from here? What’s in store over the next four years. First, let me say this. No one has a crystal ball. Any stock market forecast that you may hear from analysts is simply an educated guess. They may get lucky for the right or the wrong reason. Or analysts might miss the mark by a wide margin. As we already know, even the smartest folks in the room don’t know the future.
Besides, we already know that consistently timing the market is nearly impossible. However, over a longer period, we recognize that stocks have historically had an upward bias.
“Since 1932, the S&P 500 Index has gained an aggregate of 710% under Democratic presidents and 375% under Republican presidents. But staying invested the entire time would have earned 47,000%,” according to [ https://www.schwab.com/resource-center/insights/content/election-watch-what-should-investors-expect].
What’s that mean? If you shunned stocks when either a Republican or Democrat was president, you missed out on the lion’s share of the market’s gain. A disputed election could create short-term uncertainty. Yet, emotional decisions made outside the boundaries of a well-crafted financial plan have rarely been profitable over a longer period. Longer term, the economic environment, Federal Reserve policy and interest rates, corporate profits, and inflation trends have historically had the biggest impact on the broader market.
The country will remain divided after the final tally is known. But let’s not forget that the U.S. remains the world’s largest economy; it has the deepest and most transparent capital markets, and innovation isn’t likely to end. The recent rally in the market to new all -time highs is a reflection of this. There have been a couple of events that have magnified this.
The first is the recent announcement of a vaccine for the Covid19 virus. Two companies have released test results that show a greater than 94% efficacy rate. They are both expected to apply for emergency use and begin administering it. The second is the assumed result of the control of the Senate. Although the results won’t be known until the run-off elections in Georgia, most market participants are assuming at least one Republican will retain their seat (Predictit.org), giving the Republicans a majority and thwarting a President Elect Biden’s agenda.
Both events come with some caution and I think defensiveness should be reflected in equity exposure. Should both Republican candidates lose their election, the Democrats and Republicans would each hold 50 seats and Vice President elect Harris would cast the deciding vote. The results of the election won’t be known till the first week in january. Even with a vaccine, there is a period of time before enough of the population is inoculated. There are limitations on supply, storage availability and social acceptance. During this period, the virus is still spreading, infecting and crippling economic growth. The state of Illinois, like many others, are implementing restrictions as the case load on hospitals approaches critical levels.
The virus still remains the biggest risk to the financial markets, in my opinion. Infections, hospitalizations and death are spiking nationally and globally. The economic impact is being negatively affected as the fiscal response from this spring subsides. Unless there is additional fiscal stimulus to address unemployment insurance, PPP, small business assistance along with state and local government assistance, the devastating impact of the shutdowns will begin to cripple the economy. The fiscal and emotional toll on society could be larger than this spring.
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We will face challenges in the days and years ahead. We have always faced challenges. But we are resilient, and I continue to believe that history is on the side of the United States of America.
The opinions expressed herein are those of Riverbend Planning Group. The data and opinions are furnished for informational purposes only and should not be considered a solicitation for an investment decision. Although it is derived from sources believed to be accurate, Riverbend Planning Group makes no guarantee to the accuracy of the information