The Markets, Elections and Uncertainty

Uncertainty is Omnipresent

As we are about to enter the final calendar quarter of 2020, we're all feeling very uncertain.  There are a great number of unknowns around the election and the effects of COVID on our health and economy.  I'll address my thoughts around the election and the markets shortly but before I do, consider the following:

Remember the last time we had a "certain" market?  I would probably peg that at about last December, 2019 or maybe even January.  We were coming off a strong year in terms of market performance, and we all felt so certain, didn't we?  Not a care in the world, everything felt so "right."  But that didn't quite play out in 2020, did it?  Certainty in the market is illusory, and the reason why no investor or advisor should consider stocks and other growth investments for any use other than long-term needs.  Uncertain is the norm and that's why we diversify and have safer money for short-term needs, and stock/equity investments for future needs.

Election Day looms 

But since we're stuck in these uncertain, unprecedented (and unwanted) times, we're rightfully nervous about our future.  And I'd suspect that the election is the leading concern of many if not most at this point.  And for some reason I keep hearing that if such-and-such party gets elected, taxes will do this or taxes will do that which will make the markets do this, that, or the other.  But if you've heard that if one political party has historically affected the stock market in a more positive way than the other party, or that election years are better or worse for the stock market than other years, you got bad (or misleading) information.

A few resources that help to illustrate this are a web article from Vanguard and a video (about 4 mins) from Dimensional .  The theory that one party will have a dramatically "better" effect on the market than the other is statistically invalid which is demonstrated in either resource.  It is true, however, that certain industries may perform better under one candidate than the other, but the opposite will be true for other industries.  So put aside the notion that one candidate or the other will be inherently better for your investments, or that a change in taxes will have an opposing effect on the markets.  Those statements is false.

So if everything is uncertain, what can we do?  We spread out the risk by diversifying.  Many different companies in different sectors in different global markets.  By diversifying -- and doing so globally -- we minimize the non-systematic risk of the portfolio and allow the markets to work for us.  There has never been a better creator of wealth than owning companies, and the stock market allows any investor the ability to buy portions of companies cheaply and efficiently. So instead of guessing what stock or industry will do better in the next period of time or what economic cycle is coming next, we invest the proper portion of our money in a way that takes advantage of the long-term returns of capitalism -- through a diversified stock portfolio. 

COVID reset our expectations, but that's not all bad

Our world is markedly different than it was a year, or even just seven months ago.  Things that were "normal" to us before are now either different, on pause, or habits of the past never to be repeated.  But that doesn't mean that there can't be positive growth in the markets.  This recent article will likely ring true to your experiences, or at least parallel them to some degree.  The fact is, when we diversify, we substantially increase our exposure to companies and industries that we may otherwise ignore which may benefit us when things become uncertain or unpredictable (which is always).

The market knows what you know

Whether it be the results of the elections, or the constantly evolving knowledge about and war against COVID, the markets know everything you do.  And all your expectations, along with the expectations of everyone else that invests in the markets, are already priced in to stock valuations. This is known as the Efficient Market Hypothesis (EMH) which was originally posited in 1900 by Louis Bachelier, refined over the years by Benoit Mandelbrot and Paul Samuelson but brought to the forefront of academic research by Eugene Fama in 1970 for which Professor Fama was awarded the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel (e.g. Nobel Prize) in 2013.  So if you think "it's obvious that <such and such> will happen" then the market has already priced that in, and there's nothing you need to or can do at this point.

But... The Taxes!

Yes.  If the challenger should win the election, it has no secret that he plans on implementing a different tax structure.  And it is absolutely worth planning out tax strategies if that happens.  But as of now (September 2020) we don't know the results of the elections nor do we know any specifics of any potential tax law changes. But even when we do, tax planning is not based on speculation or expectations other than what is defined in the tax code.

This is not meant to be a political statement but I found this to be an interesting fact: Even though the Republicans consider themselves to be more fiscally responsible, Nouriel Roubini (professor of economics at New York University’s Stern School of Business) finds that US recessions almost always occur under the GOP.  So don't take the leap of assuming that lower taxes are always better for the economy.  (Reminder: the economy is not the same as the market, which is very apparent this year)

Have a Plan.  Stick to Your Plan.

Election cycles create noise.  A LOT of noise.  But noise is not a reason to change a well thought-out financial plan.  Noise should be expected in the planning process, and elections are no different.  Yes, things will change, but change happens constantly, so this is not a reason to abandon a well-laid plan.

Now is the time to focus on the things you can control.  Review your plan, go out and vote, and get ready for 2021.