The Enduring Market & Patient Investors

John P. Swift, CFA, CPA Chief Investment Officer
312-259-9595 or jswift@trustbenchmark.com
November 01, 2020

My Positive COVID -19 Test

This special edition of our Market Outlook comes as I deal with a positive COVID-19 test I received earlier this past week. Today is day 5 of my containment in the basement of my Chicago home, and I want to acknowledge the tremendous amount of love and well wishes that I have received from my amazing friends and family during this difficult time.

Words fail to express the deep love and admiration I have for each one of you who have offered words of encouragement and support. You are my heroes.

I have been, and remain, asymptomatic, and I am feeling great. Thank God! This flu is nothing to fear among my cohort of (relatively) young, otherwise healthy Americans, but my experience should suggest that you all need to stay vigilant in protecting yourselves and your family. There are many Americans with pre-existing conditions that are pre-disposed to have a much different experience after a positive COVID-19 test result, and my heart and prayers go out to these folks for their full and speedy recovery from this highly infectious disease.

I became complacent; many of us have, and here I am contained in my basement. Do not make that mistake! Stay vigilant.

With that, let us turn our attention to the tumultuous last week of trading and the outlook for the market.

Fear and Loathing on Wall Street

Of course, the impending U.S. election weighed on the market this past week, but this is not the only thing on the mind of investors which has just suffered its worst week since last March, with losses ranging from 6.5% on the Dow Jones Industrial average to 5.5% in the Nasdaq Composite.

The rising COVID-19 case count in Western Europe and parts of the U.S. also were main contributors to the market’s angst this past week as investors fretted over the actual and possibility of renewed calls for economic shutdowns to stem the tide of these infections.

On the flip side, the economic data released last week was much more encouraging.

The Cares Act, the $2.2 trillion fiscal relief package passed back in the early Spring, provided money for consumers to spend which resulted in real gross domestic production (GDP) to expand at a record 33.1% seasonally adjusted annual rate in the September quarter. But GDP contracted at a record 31.4% rate in the second quarter and a 5% annualized rate in the first, which left the U.S. economy some 3.5% below its pre-pandemic peak.

This net 3.5% decline is very typical of the trough during a standard recession.

The good news is that spending on goods soared at a 59% annual rate in the third quarter. Consumer spending on services, such as travel, recreation, and entertainment, has been shifted to spending on consumer goods.

But that shift has its limitations.

After all, how many new pets and Pelotons does a family need? Once you buy a new riding mower, you are set on lawn maintenance equipment. But after you enjoy a lovely meal at your favorite restaurant, you might be hungry again tomorrow. Thus, the recurring and enduring demand for services versus consumer goods.

As a result, a sustainable recovery will not occur until the service sector is fully open because services accounts for 60% of GDP and over 85% of our workforce. The partial reopening of the economy this summer and fall still left the service sector jobs 10 million below levels of early 2020. You only need to look inside your local restaurant to know that is true.

A Quick Sidebar on Support of Our Great, Independent Chicago Restaurateurs

Regarding restaurants, specifically Chicago restaurants, we have always been, and will always be an independent restaurant town here in Chicago, and we need to support, more than ever, our family-owned restaurants. If they die, an especially important piece of the Chicago fabric dies with them.

Support your local family owned restaurant today or the phenomenal, family owned Italian restaurant in your neighborhood today becomes the Olive Garden tomorrow. Perish the thought!

We Need Additional Fiscal Stimulus

Now, without additional fiscal assistance and further progress on the medical front, the recovery will not be sustained while the service sector remains partially shut down. Folks are running out of money to spend on new cars and household appliances.

A Helping Hand from the Federal Reserve

I would be remiss in not mentioning the helping hand and bridge over troubled waters that our Federal Reserve provided in the spring by slashing short-term interest rates to zero and pumping liquidity into all sectors of the financial markets. If there is one person that all Americans should be rallying around, it is Federal Reserve Chairman Jerome Powell. He has proven himself to be the steady hand in turbulent times, and I believe, he has earned our respect.

The next Federal Open Market Committee meeting is scheduled to convene this week on Wednesday and Thursday. No doubt they originally scheduled this gathering to occur post-election, but since the election issue will likely not be decided by then, I expect the Fed to lay low this week as to not interfere with the post-November 3rd machinations.

We will have enough to think about this week.

2000 Redux?

A recurring question that I am fielding lately is “what happens if the U.S. Presidential election is contested?”

My answer has been that the market reaction will not be as volatile as the 2000 contested election which saw stocks slump an additional post-election 12% while we watched Florida election officials debate hanging chads on punch cards which was on top of the 6% pre-election reduction experienced during the Fall, 2000.

First, unlike back in 2000, we have come to expect a contested election. A contested election will be a surprise to no one.

Second, we just experienced, in my opinion, the pre-election sell off this past week of 6%.

Finally, another major difference from today is that in 2000 the Federal Reserve was steadily pushing up interest rates even after the bursting of the dot-com bubble earlier in 2000 (which turned out to be a Fed mistake which created the 2000-2001 mild recession).

Now, as we know, the Federal Reserve is all in on support of the market and the economy with accommodative monetary policies and all-time low interest rates.

As a result, weakness today in prices is a buying opportunity for long-term investors.

Another Hopeful Sign

As tough as trading was this past week, I am encouraged by the rebound in the market Friday afternoon. That trading pattern indicated to me that the pre-election correction of down 6-8% was completed which is in line with the downturn the market experienced in the days leading into the 2000 and 2016 elections.

Of course, this is not a full proof bottom to the market, but since I do expect much better tidings for 2021, the current valuations provide a good buy-in point for new money, and prices might get even better this week.

A Final Thought on the Election

Tuesday, November 3rd, is a day that could not have come fast enough for many. Many are bracing for the worst. The determining factor will be whether the election result is contested. It would not be the first contested election in U.S. history, yet it just might be the most contentious contested election given the strong partisan divides evident in political rallies and protests across the land and on social media.

Eventually a winner is going to be declared. I suspect we should know towards the end of this week. When that time comes for not only the presidential election, but also the composition and leadership of Congress, the stock market will react, riding on many knee‐jerk assumptions about the implications of who the President is, who is in the leadership roles in Congress, and what policy proposals that might mean for certain stocks and sectors, and how the economy is apt to perform.

We will not get too wrapped up in any of the knee‐jerk responses of skittish investors who have either owned or not owned stocks based on their predicted election outcomes. Investing in this manner is a fool’s errand. We view any weakness in market prices today as a buying opportunity for long-term, patient investors.

Market Expectations & the Political Landscape

The narrative in the stock market is that President Trump is the more market‐friendly candidate with policy positions that emphasize lower tax rates and less regulation. Former Vice President Biden, meanwhile, is seen as a less market‐friendly candidate given his emphasis on raising the corporate tax rate from 21% to 28%, raising taxes for anyone with income over $400,000 a year, and taxing long‐term capital gains and qualified dividends at the ordinary income tax rate of 39.6% on income above $1 million.

The market will endure and ultimately thrive under either regime, my friends!

One issue President Trump and Mr. Biden seem to agree on is the need for more fiscal stimulus. The differences arise in the amount of stimulus, where it is directed, and whether there is COVID liability protection for businesses.

Notwithstanding the differences, the stock market is convinced more stimulus is coming after the election. It is likely correct with that assumption, but it might be getting ahead of itself in thinking it is going to come easily in a lame‐duck session. It is well known that there are several Republican senators who have objections to a stimulus deal that approaches, or exceeds, $2 trillion. That is not going to change in a lame‐duck session.

Also, if Mr. Biden wins, it is not a given that there will be a $2 trillion stimulus package. Remember, Democrats would also have to win majority control of the Senate, and they will have to do that with a decent cushion if they have any shot at removing the filibuster, which would enable a stimulus bill to pass with a simple majority.

In any event, it is not out of the realm of possibility that additional stimulus will have to wait until 2021 and/or that any stimulus package ultimately approved is a much smaller package. That could be construed by the stock market as a negative for recovery prospects no matter who wins the presidential vote.

There is a lot of handicapping going on right now in terms of what various outcomes will mean for various sectors. There are innumerable takes on what the market, individual stocks, and what certain sectors might do.

The only take that resonates is that it will likely be volatile in the near term, with more of a downside bias in the event the election outcome is contested.

It bears repeating, that with a long-term, patient focus we will be buyers in the face of that potential market turbulence.

Of course, there could be an upside bias in the near term if the result is not contested, as that would produce an element of a relief rally in the market. We will all welcome that potential occurrence.

How Does the Market Perform Under Democratic & Republican Presidential Leadership?

We have seen several studies recently that have come out showing how the market has performed during Republican and Democratic presidential years. Some Republican Presidents have done better than some Democrats during their time in office, and vice versa. The key takeaway here is not about whether the stock market has done better under Democratic or Republican Presidents.

The key takeaway is that the stock market has a winning, long‐term track record regardless of which party’s candidate ends up sitting in the Oval Office.

The coming week will provide another momentous episode in U.S. history, but no matter the outcome, do not forget that the stock market’s long history has rewarded patient‐minded Republican, Democratic, and Independent investors, alike.

Finally, when the dust has settled on the election this week, the winner will remain or become MY President.

I will express my opinions, voice my concerns, but I will always defend MY President against all foreign influences.

At the end of the day we are not Republicans or Democrats or Independents, we are ALL Americans.

Millions of our fellow Americans have paid the ultimate price to secure our independence, defeat tyrannical rulers that have threatened us and our allies, and we have fought though depressions, recessions, and pandemics.

We have our problems, but we remain the greatest country in the world, and as certain as I will walk out of this basement in 5 days, we will endure!

Find a place inside where there’s joy, and the joy will burn out the pain, and it is in the joy of knowing, working and loving each and every one of you that the pain of COVID-19 has been eliminated from my soul.

Warm regards,

John