The Market Reacts to the Election – Part 2

 In Investments, News

This is the second time that we are writing about an election in only a three month period of time and hopefully the last time we write about an election for a while! This week, the people of Georgia voted in the runoff elections for two Senate seats. Results of the elections defied the consensus (pollsters seem about as good as weather men at predicting the future) yet again and as of the writing of this post it looks like both Democrats will be elected. The last Democrat to serve in Georgia before this had been Zell Miller in 2005, nearly 15 years ago. This will shift control of the Senate to the Democrats. This means that they will control both the legislative and the executive branches of government, with Republicans controlling the judiciary branch. If investors had taken the advice of the “experts” in the media they would have sold stocks prior to this event. However, how did the stock market react? After some early morning selling on January 6, 2021, the S&P 500 closed up a half a percent, the Dow closed up over 400 points, and the Nasdaq closed down a little over half a percent. Hardly the calamity that some in the media had said would occur.

We have discussed in the past that the media is not designed to help people be good investors and that the point of media is to get you to watch more media. We think that this has been clearly demonstrated again in the past year. That is why we believe that economic forecasts and market predictions are best left to magicians, fortune tellers, palm readers, soothsayers, and the media. We don’t believe in predictions or forecasts and investing based on emotions (and not analysis) will cause an investor to make the wrong moves. The graph below looks at all of the events that happened in 2020 and how the market reacted. Who would have believed that back in March when college basketball was cancelling March Madness and the Federal Reserve was cutting rates to zero that it was a great time to invest? We took advantage of the lower equity prices in March for our clients by adding to U.S. stocks even though we saw many predictions at the time that the markets would keep moving lower. Reading the headlines for the year without the chart would make you believe that this was a terrible year to be an investor. However, the S&P 500 was up over 18% and the MSCI ACWI was up over 16%.

Data from 1/1/2020 – 12/31/2020. Source: ICI, FactSet, Avantis Investors. Past performance is no guarantee of future results.

For those that wonder what the economic ramifications of the Democratic sweep will be, we would emphasize that the federal government is still fairly divided as the margins are very tight and it would only take one or two Democrats not agreeing with their caucus for a bill to fail. This would include senators from Ohio, Pennsylvania, Arizona, West Virginia, and Wisconsin. Most of these states have one Republican and one Democratic senator. This will likely mean that the most extreme ideas that have been kicked around such as the Green New Deal or single payer health care may not pass. Also, since we construct global portfolios, even if we assume that the U.S. government will influence the price of U.S. stocks it is even less likely to affect the prices of international stocks. This is one of the reasons that we do have global portfolios as they protect against risks that may be felt in one economy and not in another. Taxes may increase here in the U.S. on corporations and individuals but we would expect that these tax changes would need to be incremental to pass. Corporations have been fairly good at sheltering themselves from paying high taxes in the past and we would expect them to continue to find ways to pay the minimum amount of taxes that they can. Many business also have an ability to pass higher taxes on to the people and businesses that use their services (i.e. they have pricing power) and our fund managers look for companies that can do this.

A stock portfolio is a collection of businesses and what our fund managers do is evaluate the prospects of these businesses. Also, when we are investing we are not looking at the results over a one or two year period but over a lifetime. We know that over this time period stocks will outperform bonds and bonds will outperform cash. We also know that buying quality businesses at good to great prices will benefit our portfolios and compound our clients’ capital. We don’t know where the markets will go in the short term (meaning the next year or two) but we believe that the disciplines that we apply to investing will lead to long term success. We will be here to guide our clients and their portfolios through whatever future events transpire and take advantage of opportunities as they are presented to us and reduce risk when we are not getting paid to take it. These opportunities are likely to arise at times and in places that don’t look particularly good at the time of the investment, much like when we added to stocks in March when the markets were near their lows.

International and emerging market stocks look similar and are attractively priced even though past returns have not kept up with U.S. stocks. However, we believe that much like adding to U.S. stocks in March when prices were lower and the news headlines were bad at the time, owning and adding to international stocks now will be rewarded over the next several years. We look to reduce stocks when prices are too high, which is generally when the news headlines indicate the opposite should be done – we want to buy low and sell high.  Most investors agree with this concept, but it can be very difficult to do when an investor is making decisions based on emotions. This is the discipline that we bring to the investing process on behalf of our clients and how we invest our own money.

Please contact us if you have questions or we can help in any way.

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