We are finally rounding the bend with the home stretch in view for the balance of 2020. This has been a year to remember so far, and I expect we will have more fireworks before this race is over. Three major factors will be impacting the way the economy and equity markets move between now and the end of the year and potentially years to come. The Federal Reserve has assured us that they don’t plan any changes to monetary policy until 2023, so I don’t expect to see any significant changes in fixed income markets as a result of either factor.
Since I originally wrote this article, Justice Ruth Bader Ginsberg has passed away. While she will be remembered as one of the most significant Supreme Court Justices of our time, unfortunately her passing has ignited a new, powerful political fire within the Washington Beltway. This new debate and process could overshadow the other major issues of the election and pandemic in regard to the markets and even the future of our democracy as we have known it. As is required under the Constitution, the president will put up a nominee for the vacancy, and then the problems begin. History would tell us that the Senate should go ahead and vote on the nominee, but then we look at 2016. Arguments will be made that there should be precedents set by the postponement of the vote for Merrick Garland, and others will argue that only six out of the 28 nominees from the lame-duck president have not been approved. I won’t speculate on what is right or wrong, but this battle could also have significant impact on the upcoming election, in addition to the immediate market impact. It had an immediate, negative impact on the markets, and the events surrounding it could have more significant long-term impact. Chuck Schumer, the Senate minority leader, has stated that if the Democrats take back the Senate, that “nothing is off the table” if the Senate moves forward on a nominee. He has indicated that he would plan to “pack the court” by increasing the number of justices from nine to 15 and eliminating the filibuster in the Senate, as well as annexing Washington D.C. into a state with two more senators that he assumes would be Democrats. Nancy Pelosi has stated that there are “arrows in the quiver” to have an impact on the process. The Republicans are saying that they have a constitutional obligation to proceed, even though that is a change from 2016. American history would show they are correct, but these are the same people that made the argument against last time. This political battle will make everything in Washington more divided instead of creating any possibility for bipartisan cooperation on anything that comes up, including pandemic relief. We must remember that the last time there was a recession in Washington D.C. was after the White House was burned in 1814 during the War of 1812. Political wrangling is all important to the bureaucrats and politicians that live and work in the area, but they are mostly immune to the economic realities the rest of us must deal with. This current battle will probably get in the way of additional pandemic aid and may dominate the media until the election. If either party abandons the historical norms and processes of the U.S. government, there will be consequences that we cannot predict, but it is certain that the impact on the economy and markets will be negative in the next few years.
As everyone now knows, I believe, for the first time in my career, that it makes sense to “time” the equity market by stepping out for the election this year. The risk for a substantial sell-off outweighs any risk for a drastic bounce and stepping aside until after the election is decided and the dust settles appears to be the most prudent action. This is only a temporary step, and I would recommend that clients be back into the markets by no later than the end of May, regardless of the outcome of the elections. I plan to move my money out before October 15 and reinvest approximately 30-45 days after the final outcome is decided. Because of the Supreme Court issue, we may already be in the initial phase of this market collapse because of the uncertainty between now and November. This election is setting up to be contested regardless of who appears to win; there will be a period of complete uncertainty until a decision is final, and history tells us that the equity markets can’t stand significant uncertainty. Electoral votes must be cast by December 14, but court battles can still blur the result. If it goes on very long, there will be an opportunity for the S&P and NASDAQ to easily fall 35-50% before we see the recovery.
In addition to these two important events, we still have to deal with the continuing pandemic and if or when we will have an expectation of relief. At this point, it is difficult to determine where the vaccine testing really stands, with different comments coming from all the “informed” sources. Until there is clarity on this whole issue, news will have daily impact on the markets because the computer algorithms appear to be using this news as part of the daily trade trigger. This just adds volatility that exacerbates any market moves tied to virus news. As soon as we have some concrete news on vaccines, treatments or significant drop in cases, the markets will probably have rapid recovery regardless of the election results. This is part of the reason we may not want to be out of equities for very long after the election is certified! There is a lot of hope that the recovery will continue without big interruption and getting people out of lockdown will be a huge impetus for that recovery to accelerate. It is wishful thinking to expect a vaccine to be widely available between now and Thanksgiving, but any positive news on this front would certainly be reason to be thankful.
These factors surround all the other issues that have had and will have an impact on our business going forward. So far, The Leaders Group has had a good year with revenues up by more than 20% and increasing our count of financial professionals by over 200 since 2019. The new AG49A will have an impact on indexed insurance products, and many carriers are looking at registered products to avoid some of the issues created. Lower interest rates continue to drive money into the equity market in both growth and value stocks looking to replace the less than 1% returns in fixed income. New regulation and higher taxes will lead to new opportunities for us to provide new solutions for our clients. All of these will lead to a successful future in our industry and more potential for our clients to prosper with our advice.
As we head down the final stretch of 2020, we can see the end of the year, but still not see all the obstacles or additional pitfalls between here and there. We will try to continue to provide insights throughout the fourth quarter and look forward to a thankful, merry and happy holiday season as we get to the end of this most memorable year.
All my best for a hopeful year end, a thankful November and a joyous holiday December!
Stay Safe and God Bless!