How to Invest in an Election Year Sprinkled with Disasters
The year 2020 will have a prominent spot in history books. And the year isn't even over yet. Is it time to emerge from under our blankets? How are we to plan for the rest of the year? Market analyst views are as polarized as current politics. But there is good news for investors.
2020, the year we will not speak of or the year that must not be named. Before we discuss investments, here are some of our favorite 2020 memes:
As if COVID-19 and its effect on the economy wasn’t enough to scare investors into hiding. The presidential election is adding a fair amount of distress. Fears are stoked by the risks of an election postponement and disputed election results. To top it all off, the stock market reached all-time highs. Is it time to sell and wait until 2021?
Don’t let the election scare you into hording your cash under your mattress just yet. Historically, election effects on the markets have been short-lived. Since 1928, the S&P 500 ended the year in positive territory 74% of the time during presidential election years (with an average annual return of 7.1%). Most of the six presidential election years where the S&P 500 was negative had obvious explanations besides the election, such as the Great Depression, being on the brink of World War 2, the end of the tech bubble, and the 2008 financial crisis. Considering these circumstances, the elections themselves had probably little to do with the drops in the market. Likewise today, other threats will have a bigger impact on the markets than the election itself.
But how reliable are historical data in 2020? Unprecedented events are creating an unpredictable environment. Leaving historical data aside, the stock market still has room to grow. But we expect increased volatility. The markets appear to disregard bad economic news because of strong monetary support from the Fed and the pending fiscal stimulus. Despite the uncertainty around the stimulus, we expect it to pass because both parties want to support lower-income families going into the election. Markets also seem to focus on 2021 when they expect a vaccine solution and improved earnings for corporations. In fact, Goldman Sachs expects the S&P 500 to end the year at 3,600. That's about another 6% gain from its current level. Looking forward to next year, Goldman estimates earnings per share for the S&P 500 to increase by more than 30%.
On the flipside, renowned investor Jeremy Grantham believes that the U.S. stock market is entering the 4th major market bubble of his career.
In the meantime, buckle your seatbelt and get ready for increased volatility in the markets. We could see another short-term market drop before the end of the year. But because of the Fed’s support of equity and credit markets, a swift rebound is likely.
It is also interesting to note that the stocks that are struggling the most this year make up a small percentage of the U.S. stock market. Barry Ritholtz, a market commentator, recently pointed out that these struggling companies are among the most visible industries in our country. That’s why we hear so much bad news while the markets continue to rise. Technology companies, which benefited from the global lockdown, make up a large fraction of the U.S. stock market.
The S&P 500 index, for example, contains 500 of the largest companies in the U.S. These companies represent about 80% of the entire U.S. stock market capitalization. About 450 of these 500 companies are struggling this year. On the other hand, Microsoft, Apple, Amazon, Facebook, and Alphabet are booming. These five companies make up about 22% of the S&P 500 market capitalization. That’s right, just five companies out of 500 represent 22% of the S&P 500. Internet content, software infrastructure, consumer electronics and internet retailers are doing well. These four industries alone make up close to 25% of the U.S. stock market. That explains why we hear so much bad news from small but visible industries (like retail stores, airlines, hotels, gas stations, and restaurant chains) while the stock market as a whole is still doing well.
Barry also pointed out that the U.S. economy and the stock market are two very different animals. One can struggle while the other prospers. But even the struggling economy may be on the rebound. Charles Schwab’s experts expressed a belief last week that the deepest point of economic contraction is behind us.
With all the uncertainty in the public markets, we find it prudent, more than ever, to have alternative investments as part of your portfolio.
In conclusion, here are a few more memes we liked: