Monthly Market Muhsings - October 2020

Markus Muhs - Oct 29, 2020
A little market update before the election.
In an effort to get this post done before the weekend and give people more of a chance to read it in advance of Tuesday's U.S. election, I'm writing it mid-week—before we know month-end closing numbers of the markets—in the midst of markets freaking out about one thing or another (be it COVID cases, fear of Trump winning, fear of Biden winning, I don't even know anymore).
No market tables this month, and I reiterate anyway that what stock markets do in the span of a month is highly inconsequential. If you have to know, it looks like the TSX Composite and S&P 500 are down 2-3% for October. A day's performance can either make those numbers flat, or turn them into 5% down, who knows.
Over the past couple months—in fact, going back to last year—I've been sharing articles via my eNewsletter (click the link to sign up) reviewing facts and evidence around Presidential elections, and past U.S. government mandates, and their effect on the markets. The bottom line is that there's either very little evidence supporting one party over the other as being "better" for the markets. Past data might favor Democratic Presidents over Republican, but I think there isn't enough historical data to draw that conclusion, at least that which isn't circumstantial (ie: the Great Financial Crisis coinciding with the tail end of GWB's term and beginning of BHO's sways the overall data significantly on its own).
There is, however, strong evidence proving that allowing politics to impact your long-term investment strategies would have had a negative impact on your returns. Invesco's 10 Truths No Matter Who Wins piece has been widely circulating online, and it goes to the extreme in its graph on page 4, showing what the growth of $10,000 would have been, since 1896, only when either a Republican or Democratic President were in office. Really, it's more showing the importance of being invested in the markets ALWAYS and the impact that being out of the markets half the time can have on your overall returns. There are a bunch of other great graphs in this piece.
Dimensional Funds also created this cool interactive exhibit showing long-term historical growth split up by Presidential terms. You can click on any particular President to zoom in on what happened in that particular term.
The ever-analytical Ben Felix created this Common Sense Investing video on U.S. elections that sums up a bunch of the same info, as well as trying to explain scientifically (by economic circumstances) how it might be that Democrats are elected during times of risk aversion (when markets are cheap, thus leading to higher market returns over their terms) and vice versa. 
I've been saying for a while now that I wouldn't make any predictions around the election or in any way try to suggest an investment strategy based on the election event, but I'm going to go back on my word just a little: 
This upcoming Presidential election is like a baseball game between the Blue (Dem) Jays and Red (GOP) Sox. In normal years, the 9th inning is around midnight eastern time on Election Day and we know the winner. 2000 was the last time they had to go into extra innings to determine the winner.
This time around, going into the election we already know that the game will only be in its 6th inning by the time midnight rolls around thanks to the extraordinarily high mail-in vote. As of October 28th, over 70 million Americans have already voted, two-thirds of them by mail-in ballot. A variety of different rules state-by-state regarding mail-in voting also will lead to significant delays from some states, including significant swing-states like Pennsylvania, so we might not know anything by midnight on the 4th.
Both teams are fairly evenly matched, but the Blue Jays have a far better relief pitcher (mail-in vote is expected to be skewed heavily Democrat). If the teams are more or less even after 6 innings, it'll likely end up being a Blue Jays victory. For the Red Sox to pull out the win, they'll need to have a good lead by that point, and even then it's tenuous. 
My election prediction is more around investor psychology than political policy. Mutual funds and ETFs have had near-record out-flows in the past couple months, for obvious reasons (both worry about the upcoming election AND overall COVID-resurgence). I keep hearing different numbers from different sources, so I won't point to any one particular stat, but in general they all say money is flowing OUT of equity funds en masse. From one source I heard overall equity fund outflows have been the worst since 2009, while other sources just say they're just pretty significant. People have already been sheltering their wealth since summer, and others have been holding back new investments. I sense the trepidation in my own clients, whether worry about their existing investments, or investing new cash.
What does this all mean for you if you're fully invested right now? Should you follow the herd stampeding for the exits? Does that sound like the smart thing to do, or has it ever worked out for anyone in the past? 
I was scouring the internet for a chart I can show you here that won't violate any copyright laws, but that's difficult to do as often this fund flow data is proprietary. The usual chart on equity fund flows, that I've seen over and over again throughout my career is that retail investors as a whole always do the opposite of what they should do. Flows into equity funds are at their highest when equities are at highs (less opportune time to be buying) and flows out are at their highest during lows and times of high volatility, when it has always been the best time to invest. I will point you toward a Business Insider article from 2016 on the matter to make my point. Hindsight's 20/20 for us (wonder if that saying will eventually take on new meaning...), as the minor correction in stocks in 2015/2016 paled compared to the 2018 and 2020 bear markets, but you can see investors were frightened at that time too. They were also going into an election at that time, and whoah were they in for a surprise! 2016 was a great time to invest new cash though; once economic/market/political uncertainty waned, with 2017 being one of the best years we've had in a while.
So, going into Tuesday's election, what we know is that investors have already gotten more cautious. Money in retirement accounts that should be invested long-term isn't, and it's waiting for a chance to be invested long-term. That chance will come sometime after Election Day; I just don't know when precisely.
Take it from Jack, we truly don't have a clue: 
Market timing is the gamble; not investing. Collectively, we've been so bad at it that it's like losing 10 hands in a row at blackjack: just step away from the table already. Your long-term money—whether it's meant to accumulate and grow for a retirement 10+ years away, or whether you're already retired and it's meant to generate reasonable growth and income over a few decades of retirement—should be invested as per your long term strategy, no matter what's happening in the world, no matter if it's 2020, 2019, or 2018.
I'm sorry if you've read this far looking for advice on how to position your portfolio going into the election. Best advice I can give you is to stop letting current events dictate your long term investment approach.

Markus Muhs / CFP, CIM


Subscribe to my eNewsletter