“Chaos was the law of nature; order was the dream of man.”
There seems to be a lot going on if you haven’t noticed. Even beyond the craziness of politics and the Coronavirus infecting the whole Executive Branch. We are well into the Greek alphabet on Hurricane names as we ran through the English alphabet in early September. A “Gigafire” a wild fire burning over 1 Million acres is consuming California and my kids still won’t do the dishes without threats of violence. But of course, the biggest thing on everyone’s minds is the Election, which I am going to address in a wishy-washy way that hopefully doesn’t offend anybody.
Many people say our system is broken, that nothing gets done anymore; yet we seem to make an awful big deal about who is going to be the next President. Now elections are important, and there are many things “on the ballot” as they say, beyond the economy and the stock markets. Extremely important things that I am going to completely ignore and just talk about the economy and the stock markets. The President has less impact on the economy than most people seem to think. Tax law, regulations and policy changes certainly have impact on the economy; but those impacts tend to be felt over time and typically come with unintended consequences that can offset any positive or negative impacts these policies were supposed to have. The repeal of the Glass-Steagall Act in 1999 helped boost consolidation and profits in the financial sector and was proposed by a Republican Congress and signed by a Democratic President. It also helped make the financial collapse in 2008 that much more serious by exposing Federally Chartered Banks to market risks they couldn’t have taken before the repeal. Any proposals by either party in regards to taxes, regulation and other policies also face the many restraints in our system that make it next to impossible to pass legislation exactly the way a campaign website might claim it will. Tax laws need to be passed through Congress and Senators and Congress People from both parties tend to get pretty ornery when something affects their state or district specifically. Every Democratic Senator has large and influential industries in their state, and every Republican Senator has important constituents on Medicare and Social Security. Everything tends to get watered down. Then there are regulations. The process for changing regulations is time consuming – so time consuming that regulations in my industry proposed by the Obama Administration didn’t get implemented before he left office after two full terms! Now of course a President can decide not to enforce regulations on the books but if you’re an industry that is subject to those rules, you’re always four years away from having to be back in compliance – that doesn’t do anything for long-term planning or growth. With all that said, there are things only somewhat under the Government’s control; like the general business cycle, cultural changes, demographics and international relations; and things totally out of the Government’s control; like a Pandemic and Natural Disasters, that end up mattering a lot more to the long-term economy then whether the top tax rate is 37 or 39.6%.
Of course, one candidate is the devil we know. Stocks did do very well in Trump’s first three years in office, and maybe without Coronavirus they would have continued to do well. But I bet George W. Bush wishes he could take 9/11 out of the market returns during his term – and Obama wishes he wasn’t on the hook for early 2009 when the second wave of the financial crisis hit. There is so much randomness baked in that you can’t judge a President based on what the market did while they were in office. As mentioned, it takes a while to put your policies in place – so when do we start the clock? Election day? Inauguration Day? After the “first 100 days?” If we look back on the last 40 years, depending on when you start you get very different results as measured by the S&P 500. No matter when you start the clock on the six different Presidents over that time; the market performed the best under Bill Clinton and the worst under George W. Bush. Who finished second through fifth is very different depending on your start date (assuming we end each time frame on Inauguration Day of the next President and in Trump’s case we go through August 31st of this year.) If you go from Election Day to the end of their Presidency, the 2-5 performers were in order; George H.W. Bush, Donald Trump, Barack Obama and Ronald Reagan. If you instead start and end on Inauguration Day the order becomes; Bush I, Obama, Reagan, and then Trump. Lastly, if you start after the “first 100 days” when supposedly the new President has had time to enact their agenda the order is Obama, Reagan, Bush I, and then Trump. In every administration since 1980, except under Bush, Jr., the markets were up double digits on average and we would all be very happy with the performance of our investments. What I’m not trying to do is tell you one President or one policy or one party is better than the other when it comes to the markets. What I’m really saying is, there’s a lot of luck involved. Clinton, who blows away the pack, became President as the cold war was ending and the Baby Boomers were entering their prime earning and spending years. George W. Bush who barely squeaks out a positive return entered office just as the tech bubble burst and the country was attacked. If you want to get in a duel with your campaign signs the requisite 150 feet from the polling center next month, have at it. But don’t be using stock market performance as a proxy for how well your preferred party does in office.
With all that said, Wall Street seems to be pretty split on who will do better for the economy. Trump has been President for the last three plus years so we’ve seen how the economy has done and there are doomsayers that will tell you things are going to go to hell in a handbasket if he doesn’t get re-elected. But both Moody’s Analytics and Goldman Sachs have come out in recent days with projections that the economy will actually do better under a Biden Administration. This doesn’t mean either side is correct, I just find that more and more we all live in little news bubbles where we follow only those who agree with us. Those bubbles will tell you either Trump or Biden would be an economic disaster. The reality on the ground is that the overall market hasn’t picked a clear side. They seem much more impacted by the positive and negative news about a stimulus plan to counter the economic toll of the virus, than they do about the movement of the Presidential polls.
This doesn’t mean things won’t be different under a Biden administration. But in every market environment there are opportunities. I have talked up ESG investing multiple times in these newsletters the last year or so. You can once again watch my interview with Northern Trust’s Emily Lawrence here. Many things ESG funds try to screen for could possibly benefit from Biden’s proposals. ESG investments stress of course environmental concerns. If the EPA begins cracking down on polluters more stringently, then companies that are already not polluting shouldn’t have anything to worry about. Biden’s plans stress putting money into wind and solar power, that could help the companies in those areas that are represented in ESG investments. Then there are the social things in ESG that might make a difference. One of Biden’s proposals is a national paid family leave policy. This would be paid like unemployment insurance where companies contribute for each worker then those workers who need to take care of a sick family member or have a newborn can get paid from those funds when they take off work. If your investment philosophy already leans toward companies that have paid family leave as an employee benefit, then those firms should bear no extra operating costs from a law to that affect. Once again, we need not to think about the economy and the markets as a choice between good and bad, it’s more a choice between certain preferred industries and companies over others. None of this is to say anything is guaranteed or, if elected Biden gets any of these plans actually passed. So, we don’t overreact, we don’t panic, we just let the actual results and actual facts steer us in the right direction.
As I mentioned last month, the reality is your equity investments should be set up for a time frame far longer than a Presidential administration. In fact, there should be at least two more Presidential and four to five more Congressional elections before you should be using that money. That long-term money will be affected by things we haven’t even thought of yet; just like 9/11, the Great Recession and the Coronavirus have affected the markets over the past twenty years far more than the policies of Bush, Obama or Trump. In the short-term we could continue to see higher than normal volatility, especially over possible additional stimulus that the country so profoundly needs to keep its head above water. I usually write this a week or so in advance so if that’s already been taken care of by this writing, then you know better than me what the market reaction was. On the bonds and cash side of the equation is where the worry really should be, once again as I mentioned last month. I don’t know where you’re going to get returns from that side of your portfolio going forward, but we’re working on it.
By next month’s newsletter we will know who the President will be over the next four years. Then we can have some real speculative fun. Until then if you need anything please call, if you know anyone who needs anything please refer, and regardless of who you want to win – get out there and vote. You shouldn’t complain if you don’t vote.