FINANCIAL MARKET UPDATE 9.22.2020

AUTHOR: JOSH JENKINS, CFA

STORY OF THE WEEK

MARKET RETURN IN ELECTION YEARS

With the first Presidential debate one week away, the focus on the election is likely to intensify. Many investors are concerned about the potential impact on their portfolio, and the financial media knows exactly how to capitalize on this fear. There will be an endless wave of articles warning of grave risks, attempting to predict the future, and providing the exact way to position for it. The responsible stewardship of your life savings is not their objective. The goal of these articles is to attract eyeballs and generate advertising revenue. Be warned.

A few weeks ago, we discussed how the market has performed based on which political party was in power (Read the Article). Contrary to conventional wisdom, there is no discernable pattern between the two. This week we will view the same topic through a different lens. What if the true investment risk lies not in the election outcome, but instead resides within the uncertainty during the lead-up? This would explain investors’ common desire to refrain from investing in new capital or to lower portfolio risk ahead of time. Vanguard recently published some data that illustrates the efficacy of these strategies. The chart below shows the average return during election years versus the average in all others. With data going back to 1860, election years have returned 8.9% on average, exceeding the non-election year average of 8.1%. The implication here is that investors have historically paid a high price in terms of opportunity cost to sit on the sidelines and wait for the dust to settle.

If the volatility that investors must endure around elections to earn a reasonable return is much higher than usual, there would be some justification for de-risking. A second chart produced by Vanguard (below) takes a look at this. As you can see, the months before and after an election have actually been a little less volatile than the long-term norm. Despite the headlines, there is little evidence that election battles have a meaningful impact on the market.

Of course, just because returns have been high and volatility low on average around elections, does not mean it will be the case this time. As the first chart illustrates, there have been episodes with negative returns in the past, and clearly, 2020 is no stranger to high volatility. Still, with as anxious as many investors get about their portfolios around election time, it is surprising to see how benign these periods have been historically. Ultimately, there is almost always going to be an election or some other transitory event that people are fixated on. The key to investment success is being patient and focusing on the long-term. Stay diversified and tune out the noise.

WEEK IN REVIEW

  • Last Wednesday, the Federal Reserve announced its updated monetary policy stance, leaving its benchmark interest rate unchanged at 0-0.25% (as expected). In addition, the committee updated its economic projections for the coming year(s), expanding its forecast horizon through 2023. The median projection for the benchmark federal funds rate is unchanged at 0-0.25% through 2023, affirming the Fed’s previous indications that they will keep interest rates low for an extended period. The median forecast for 2020 GDP growth increased from -6.5% to -3.7%, although growth in subsequent years was revised lower. Inflation forecasts were increased, although inflation is not expected to achieve 2.0% until 2023. Finally, the forecast for unemployment was revised lower for 2020 and in subsequent years.
  • Data reported last week showed U.S. consumer spending slowed in August. Core retail sales, which exclude automobiles, gasoline, building materials, and food services, declined by 0.1% in August and were revised lower in July. According to CNBC, economists estimate that the reduction in extra unemployment benefits from $600 to $300 in July equated to a loss of income of $70 billion for the month, and may have weighed on spending.
  • Highlights for the remainder of this week include an assortment of Fed speakers, including multiple rounds of congressional testimony from Chairman Powell. Additionally, we will get an update on jobless claims Thursday, and durable goods orders data on Friday (which includes a proxy for business investment used in the calculation of GDP).

HOT READS

Markets

  • U.S. Consumer Spending Appears to Slow In August (CNBC)
  • Jobless Claims Were Lower than Expected, but Employment Growth is Still Sluggish (CNBC)
  • Head of Nikola, A G.M. Electric Truck Partner, Quits Amid Fraud Claims (NYT)

Investing

  • Some Investors Tried to Win by Losing Less. They Lost Anyway (Jason Zweig)
  • Negativity is Not an Investment Strategy (Ben Carlson)

Other

MARKETS AT A GLANCE

Source: Morningstar Direct.

Source: Morningstar Direct.

Source: Treasury.gov

Source: Treasury.gov

Source: FRED Database & ICE Benchmark Administration Limited (IBA)

Source: FRED Database & ICE Benchmark Administration Limited (IBA)

ECONOMIC CALENDAR

Source: MarketWatch

Do you want to receive financial market updates in your inbox? Sign up here! 

ABOUT THE AUTHOR

402.763.2967

jjenkins@lutz.us

LINKEDIN

JOSH JENKINS, CFA + SENIOR PORTFOLIO MANAGER & HEAD OF RESEARCH

Josh Jenkins is a Senior Portfolio Manager & Head of Research at Lutz Financial with over nine years of investment experience. He is responsible for assisting clients in the construction, selection, and risk assessment of their investment portfolios. In addition, Josh will provide on-going research and trade support.

AREAS OF FOCUS
  • Asset Allocation & Portfolio Management
  • Investment & Market Research
  • Trading
AFFILIATIONS AND CREDENTIALS
  • Chartered Financial Analyst (CFA)
  • Chartered Financial Analyst Institute, Member
  • Chartered Financial Analyst Society of Nebraska, Member
EDUCATIONAL BACKGROUND
  • BSBA, University of Nebraska, Lincoln, NE

P: 402.827.2300 | F: 402.827.2319 | E: contact@lutzfinancial.com | 13616 California Street | Suite 200 | Omaha, NE 68154

All content © 2017 Lutz Financial  | Important Disclosure Information |  Privacy Policy

FORM CRS RELATIONSHIP SUMMARY