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With the upcoming election now only two weeks away, and investor anxiety still running high, I wanted to remind everyone why we still believe the best approach is to maintain current allocations. We believe the big-picture fundamentals continue to favor stocks (also precious metals, select real estate, and now commodities) over bonds and cash. We therefore still believe the risk of being out of the markets is as great or greater than remaining selectively invested in the markets, despite the higher near-term volatility risk. Especially given the big picture landscape, and given how much election anxiety/uncertainty is likely already priced-in today.
In our view, while election concerns ae understandable, we think too much emphasis is being placed on the political cycle and not enough emphasis on the business cycle and global investment landscape.
We believe the election outcome, and whatever drama may precede or follow, is likely to be difficult to handicap and/or time with any degree of accuracy. And if we choose to get out of the markets, we have to be right twice (when to get out and when to get back in), which can be difficult to do.
We also think the policy differences that are likely to be actually implemented between now and the next elections will probably amount to more of an additional headwind or tailwind for the economy and markets, rather than potentially derailing them. Primarily because of the larger forces at play, but also because a top priority of either party will have to be making sure the economy completely recovers from the pandemic shutdowns over the next couple of years.
Other reasons that continue to shape our big picture view that high quality stocks remain an oasis:
While we continue to closely monitor the volatile political situation and its potential impact on the markets, as long as most of the above conditions remain intact, we remain more concerned about maintaining client wealth in this environment of devaluing currencies and near-zero interest rates, than we are about unpredictable near term stock market swings. We think more and more investors are gradually coming to the same realization, which is likely contributing to the surprisingly strong stock market and residential real estate rebound.
If those five conditions remain intact for too long, however, we think financial assets could easily keep inflating to the point of a super bubble before this secular bull market is over. And if that happens, it would inevitably be followed by a painful burst. Let’s watch.
As we have been saying since the March market crash, this 2020 recession was caused by self-inflicted shutdowns, not structural or cyclical imbalances. As a result, the economy crashed hard in the 2nd quarter (-31%) and has been rebounding fast in the 3rd quarter (+33% estimated).
The sharp Q3 rebound despite continued shutdowns is a testament to the underlying strength of the US economy before the pandemic, and confirmation that the Fed and Congress acted sufficiently and quickly enough to plug the economic holes with monetary and fiscal stimulus.
Both Monetary and Fiscal Stimulus Required:
While the Fed is doing just about all they can with monetary stimulus, that mostly ends up inflating financial assets, and fiscal (spending) stimulus is still needed to fill the gaps in the everyday economy. Now that the CARES Act is wearing off, another round of fiscal stimulus (and possibly even more in the future) is needed until the economy is fully reopened. Fiscal stimulus unfortunately is the part of the equation that requires Congress agreeing on a deal, and the days, weeks, or months of negotiating and posturing increases market volatility as investors assess the likelihood and size of a deal.
Major Tectonic Shifts on the Horizon:
As I have touched on in prior updates, there are some other very important larger-picture issues on the horizon in the overall US and global financial landscapes that we continue to pay close attention to. One is this peaking US and global long-term debt cycle and how we get out of it, and another is a likely coming reset of the global economic currency system.
The way the US and most other major countries deal with this peaking long-term debt cycle, and the ramifications of the dollar based global reserve system being replaced (most likely with a new digital blockchain-based currency tied to a basket of global currencies and gold), will have major implications for how we position our portfolios to maintain and grow our wealth going forward.
Despite our continued preference for stocks over bonds and cash, delineating between savings and investments and maintaining a comfortable cushion remains as important as ever today. While we believe the conditions discussed above make the stock markets more crash resistant today, markets are never crash proof, and there will always be periodic bear markets. Having enough cash buffer on the sidelines for upcoming spending needs, emergencies, and to ride out unforeseen market declines remains essential. Not to mention to make sure you sleep well at night and are not tempted to sell at a bad time.
This election can’t be over soon enough as far as I’m concerned. In these emotional and anxiety-provoking times, I am lucky enough to get to witness firsthand every day what wonderful and kind people our clients are, and how similar their values are, despite a roughly 50/50 mix of political party preference at any given time. That’s what renews my spirit and my optimistic outlook each day, despite what I see and read constantly in the media and on social media. I’m sure most of you have similar experiences with extended family, neighbors, work associates, etc.. We all have to make a difficult choice by weighing the good and bad of each side, and most of our differences come down to small discrepancies in how we assign that weighting. While it often feels like there are two kinds of Americans from different planets with completely different brains, I have to remind myself that it is politicians seeking power and media seeking profits that exaggerate, sensationalize and provoke us every day, too often stoking our anger and fear.
All of us at 180 are first and foremost unapologetic truth seekers. That’s what we do best. And politicians and the media are often our nemesis as we work hard every day to figure out the investment landscape and how best to position for the most favorable risk-adjusted outcomes, within each of your unique situations. Only by uncovering and laying out the facts and truths as best as we can determine them, can we help you make your best decisions.
As always, please call or email me with any questions, concerns or updates to your personal situation, or whenever you want to discuss these and other issues in greater detail.