With just days to go before the 2020 presidential electionit seems prudent to discuss economic issues facing both political camps as they seek to differentiate themselves to voters. In fact, both camps have drawn a bead on fiscal and monetary policy accommodation to reinvigorate the economy; the significance of which I touch upon in this month’s (pre-election) newsletter.
Below I’ve listed a few circumstances that should be kept in mind when thinking about the winner.
- This nation is hollering for more economic stimulus. The president wants more, the Republicans want more, the Federal Reserve wants more, and the Democrats want much more.
- Do not be swayed by those calling for a market crash and panic. While a Biden win may produce an initial declinein the dollar and weakness in price-to-earnings multiples, the U.S. has created almost 5.4 million jobs since June, home buyers are very active, the world’s central banks are tossing trillions at the pandemic, and a vaccine is possible as several late stage trials are underway.
- When confronted with 20 million people out of work, the Federal Reserve Board in conjunction with Congress has decided to expose future generations to still higher levels of debt in order to bridge the gap between 2020 mandated lockdowns and economic recovery. This strategy has produced the largest fiscal and monetary support package (as a percentage of debt relative corresponding U.S. GDP) since 1915. This is a massive relief package.
- Combining massive fiscal and monetary stimulus packages have historically energized the nation’s economy to offset such crises as WWI and WWII. However, there is a time lag between stimulus checks and when businesses on Main Street and Wall Street feel the support. This lag affect is historically approximately one year in length. We are already at work on the implications of this lag affect for your portfolio.
- As to accommodation periods: there have been five since 1915. They occurred during (1) WWI, (2) WWII, (3) 1980’s double-dip recession, (4) 2009 financial crisis and now (5) the pandemic of today. Interestingly, the Great Depression of 1929 was not among these periods of stimulus as President Hoover’s congress was unwilling to overspend. By comparison, our COVID-19 war has already cost more than any other period-even before a second stimulus bill is agreed upon-perhaps after the election.
- In the wake of such massive stimulus, bond investors are concerned about inflation. However, the previous periods of fiscal and monetary accommodation did not lead to a prolongedstock market collapse or runaway inflation.
- Also, of note: previous periods of outsized policy accommodation have consistently been followed by superior stock market returns. Caveat Emptor: past performance is no assurance of similar results in the future.
- Short-term investors (6-9 months) may want to be aware that short-term technical signals are expected to turn somewhat negative in November. This correlates to cycle C as seen below. We shall see. Cycle theory is helpful when market activity aligns with cycle theory. However, they often do not. Meanwhile, the Bull or Bearish Connotation chart below is offered up by Marketedge.com. Note all other cycles (A, B, D and E) remain bullish. To mute the possibility of high cycle correlation we have adjusted portfolio asset allocation in advance.
- More important than technical analysis and cycle theory is fundamental data, trends and analysis. Fortunately, the fundamentals are all about earnings and the direction of earnings. Since easy money may explain why price-to-earnings multiples have risen as much as they have year-to-date (18 to 22x) the key determinate to market activity is earnings momentum. Earnings comparisons are now easy.
In summary, there are times when confidence on the direction of the economy is high. The COVID-19 War has reduced confidence in the economy as a second wave of infections appears imminent. Driving this uncertainty is a 16% rise in the U.S. infection rate as the coldest seasons draw nigh. The European infection rate have risen 44% during the same period. Cooler weather may indeed facilitate a higher case count, linking fall and winter weather to cycle C.
Meanwhile, as the polls tighten in front of the presidential election a more policy-balanced asset-allocation is being employed for you accounting for an expected post-election dollar weakness, infrastructure spending hope, forthcoming vaccine production and distribution, 5G and an emphasis on value and earnings momentum in 2021. I will discuss more on the implications of a post-election economy in coming months.
Thank you again for your continued faith and trust in all we here in La Jolla daily to keep your hard-earned dollars invested for prudent growth, income and tax benefits. If you have questions or comments please feel free to address them to me: vw@vaughnwoods.com.
Sincerely,
Vaughn Woods, CFP,MBA
Vaughn Woods Financial Group, Inc.
2226 Avenida De La Playa
La Jolla, CA 92037
858-454-6900
Investors should be aware that there are risks inherent in all investments such as fluctuations in investment principal. Past performance is not a guarantee of future results. Asset allocation cannot assure a profit nor protect against loss. Although the information has been gathered from sources believed to be reliable, it cannot be guaranteed. Views expressed in this newsletter may not reflect the views of Bolton Global Capital or Bolton Global Asset Management. The information provided is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. VW1/VWA0255
U.S. Equity Strategy: Jonathan Golub, CFA, et aL, Credit Suisse: October 19, 2020
The Leuthold Group, LLC, James Paulsen, et al, Monetary Madness & Fiscal Policy, 10/19/2020