With the exception of some volatility in the last few weeks, stock markets have remained amazingly resilient. Given that corporate earnings in numerous sectors have collapsed, it would be easy to assume a significant market pullback would have similarly occurred.
That may come yet but the fact that we’ve had such relative resiliency since the start of this pandemic demonstrates the fact that it’s almost impossible to gauge where things will go in the short term. It also reminds us that successful investing is more about managing our own behaviour rather than the market.
As we write, we’re days from a U.S. election that may flip the balance of control into Democratic hands. Yet as with the pandemic, the possibility of governmental change (with its corresponding higher taxes) has similarly not affected things too dramatically.
Part of the reason for this is historical. Markets are largely politically agnostic. Over the long term, they don’t care so much who is in power, as long as there is reasonable hope of growth on the horizon.
With a rebound in GDP, along with the Federal Reserve stating that they will stick to near 0% interest rate policy for the foreseeable future, that horizon has been effectively extended.
The Wall Street Journal put it this way: Stocks Typically Climb Regardless of Who is in the White House. Over the last 91 years, one party has controlled all levels of government for half of that time. During those periods of complete control, the Dow was up 30 times and down 15. The S&P 500 rose on average by 7.45% during these years.
Over the other 46 years where there was split governmental control, the S&P gained 7.26% on average, rising 29 times and falling 16 while remaining unchanged just once. Virtually no difference. Interestingly, selloffs that occur post-election have also been rare historically.
That said, we do remain concerned about the continued rapid growth of the Coronavirus. Given some of the market’s pricey earnings ratios, if we do not see a successful vaccine in the first half of 2021, it may cause concern over a return to long term profitability.
There are also concerns with regard to the fact that much of today’s corporate profitability is coming from the technology sector. It will come under fire from new forms of legislative taxation, privacy legislation and the potential for promised technological changes in 2021 which (if enacted) will make it more difficult for AdTech firms such as Facebook and Google to maintain advertising revenue.
So, in many ways, we’re entering into a new world. Yet despite the inevitable changes we will see, it’s also likely that we’ll continue with substantial volatility for years to come. But remember, volatility is the psychological price investors pay to get ahead over time. It is also what your portfolio managers count on – enabling them to take advantage of down markets to buy the opportunities as they present themselves.