As I write this, I have just filed my 2020 tax return and paid my tax bill. I am thinking about what taxes will be like in the coming years, especially considering all of the stimulus that has been thrown in the economy to combat the corona induced slow down. Any changes to the tax law largely depends on who is in the White House the next 4 years, which brings me to two of the questions I have gotten a lot lately, “What happens if Trump wins?” and “What happens if Biden wins?” I haven’t yet heard, “What happens if Kanye wins?” Yet.
This year has certainly been one for the record books, as you will see from some of the charts below. We have seen unprecedented downward pressures followed by a whiplash inducing rebound—the likes of which most of us would not have expected to happen so quickly. I can’t help but think the volatility is not over, and we at Client 1st don’t expect smooth sailing going forward into the election either but we don’t believe it is cause for panic.
I have heard many times the market is going to fall out when there is an election and really it never has. Looking back at the performance of the S&P 500 Index since 1928, research has shown that the market ended on a positive note in 17 of the past 23 presidential election years—or 74% of the time—with an average annual return of 7.1%.
Of the six presidential election years that coincided with down markets, there were obvious explanations. In 1932, the US was in the midst of the Great Depression. In 1940, World War II was inevitable. In 2000, the tech bubble burst. Most recently, in 2008, markets suffered the fallout from the global financial crisis. Market performance in those years likely had little to do with the presidential election. And this year may follow, because of this pandemic. I believe the market has absorbed a lot of the pandemic shock but yes, expect more volatility.
True, this is going to be a contentious election, we have 4 months to go and any thing can change. Trump being a commercial president, it will be about the economy and possibly given recent events Law and Order. Biden will most likely lead from the left and one thing that can definitely emerge from that is higher taxes, more regulation and globalization. Market returns are influenced by multiple factors, including business cycles and corporate profits—to say nothing of unpredictable events such as this year’s COVID 19.
While some patterns between market performance and presidential elections have emerged, past performance is no guarantee of future results. Thus, the best option is to stick with a broadly diversified portfolio that can help you to achieve your own specific financial goals—regardless of headlines and who prevails in November.
We have designed custom portfolios for each of our clients to help them reach their financial goals and make sure they have sufficient assets in fixed income investments so they don’t have to liquidate stock portfolios in down markets. It is impossible to time the markets and even if you get out to avoid future possible losses, you never know when to get back in. Missing just a few of the best days can ruin your investment returns. See the chart below that shows the last 20 years in the stock market ending 12/31/2019 which includes about 5000 trading days. Look what happens to your investment return if you missed the 5, 10, 15 or 20 best trading days. You lost money if you were on the sidelines for the 25 best days out of over 5000!
In 2020 if you had missed the 5 best days, you would be down over 30% as you can see from this chart from Bloomberg.
This exercise highlights the dangers of trying to call the market’s peak. With the number of + or – 4% gains piling up for the S&P 500 at a pace not seen in decades, at the halfway point of 2020 one might feel it is time to pack it up and go home. Looking back, you would have to be a clairvoyant to have had a timing strategy succeed in this year’s market. We get some of the biggest rallies on those unexpected days, and if you’re timing the market, you’ve missed out on the rally really. Taking a look at historical bear markets can put things in perspective. The average bear market lasts about a year and a half and in most cases has rallied pretty significantly the following year. As we have seen so far this year, the rally may come sooner than expected.
The important thing to remember is investing is a discipline and not based on your feelings because even a diversified portfolio never “feels” good. The bottom line is to stick to a diversified portfolio with enough cash and fixed income investments to get you through the down markets, while investing the rest of the portfolio in good companies for long term growth to optimize your return over your investment years.
I hope this commentary and pictures have helped put some of the market craziness in perspective for you. We have posted your 2nd quarter statements to the Vault in the Client 1st Portal. If you need help resetting your password, you can click on Forgot Password or reach out to Morgan and she can help. Feel free to take a look and contact us with any questions you have. We are available for face to face meetings or meetings over Zoom if you prefer. Just let us know your preference.