When we wish you Joy this holiday season, you know what we mean. But let’s look at the dictionary anyway!
The Merriam-Webster people say, in part, that joy is “an emotion evoked by well-being, success, or good fortune … a state of happiness … a source or cause of delight.”
So, what are our sources and causes of delight during the holidays?
The beauty of a starlit night over blankets of snow. Spending time with our family and friends. Finding just the right present for somebody. Lighting candles. Baking goodies to share with our neighbors—or being the neighbors (baking or non-baking) who are shared with. For many of us, being grateful for what we have been given from above.
But we think that what can bring us the most joy, and not just during the holidays, is offering our time, our talents, and ourselves to bring joy to others less fortunate than we are.
All of us here at Minich MacGregor Wealth Management wish you a happy holiday season filled with joy.
Charitable Gifting Strategies for Today’s Environment
Due to a number of recent tax law changes, one’s ability to support their charities is not as “cut and dry” as it used to be. We will show you how you can still give while reducing your tax bill at the same time!
When we were young, Thanksgiving was simple. It was a day off from school, or from work. A day for watching football, or for eating as much turkey and pie as we could manage. As we’ve gotten older, though, our relationship with Thanksgiving has changed. It’s not just a day for eating, or relaxing, or even visiting with family, as enjoyable as all those things are.
It’s a day for reflecting.
When we look back and reflect, we often realize just how many simple joys and surprises we’ve been blessed with throughout the year. Every last-minute change of plan that led to something better. Every hardship endured that made us that much stronger for the next. Every door that closed only for another to open. Every goal achieved; every obstacle overcome. Every much-needed hug or kind word spoken. Every new friendship made or old rekindled. Every person who ever lent their hand to hold, their arm to lean on, their heart to touch.
Too often, we let the most golden moments of our lives go by without noticing. But Thanksgiving is a chance to count and catalog them all. So, they don’t go to waste. So, we remember them always.
Recently, we discovered a Thanksgiving poem written by a poet named Ella Wheeler Wilcox in the 19th century. It perfectly encapsulates what the day now means to us – and why Thanksgiving is so important. We wanted to share it with you because, we think you will enjoy it, too.
Thanksgiving by Ella Wheeler Wilcox1
We walk on starry fields of white And do not see the daisies; For blessings common in our sight We rarely offer praises. We sigh for some supreme delight To crown our lives with splendor, And quite ignore our daily store Of pleasures sweet and tender.
Our cares are bold and push their way Upon our thought and feeling. They hang about us all the day, Our time from pleasure stealing. So unobtrusive many a joy We pass by and forget it, But worry strives to own our lives And conquers if we let it.
There’s not a day in all the year But holds some hidden pleasure, And looking back, joys oft appear To brim the past’s wide measure. But blessings are like friends, I hold, Who love and labor near us. We ought to raise our notes of praise While living hearts can hear us.
Full many a blessing wears the guise Of worry or of trouble. Farseeing is the soul and wise Who knows the mask is double. But he who has the faith and strength To thank his God for sorrow Has found a joy without alloy To gladden every morrow.
We ought to make the moments notes Of happy, glad Thanksgiving; The hours and days a silent phrase Of music we are living. And so the theme should swell and grow As weeks and months pass o’er us, And rise sublime at this good time, A grand Thanksgiving chorus.
***
We hope this Thanksgiving gives you a chance to reflect on all the joys, pleasures, and blessings in your life. On behalf of the entire Minich MacGregor Wealth Management team, we hope you have a wonderful holiday!
First and foremost, Happy Veterans Day. Thank you to all of our military personnel for the sacrifices you have made for our freedom.
Second, this email has nothing to do with politics. It has everything to do with investing.
On Saturday, November 7, major news outlets called the 2020 presidential election in favor of Joe Biden. Once inaugurated, he will become the 46th president of the United States. This election made history, because it marks the first time that a woman – Senator Kamala Harris – will serve as vice president.
Now, elections have become more and more partisan in recent years, and this one was no exception. Some people do not believe the election is decided, and President Trump has filed several lawsuits contesting the results. We’re going to stay away from any controversy in this message and just assume Biden will be inaugurated in January. We’re not doing that for political reasons, but for planning reasons. As your financial advisors, you don’t pay us to give political opinions. You pay us to help you plan for the future — which means we need to plan for a possible future with Joe Biden as president.
Every four years, clients ask us what the elections mean for the markets. We’re going to address that now. But first, we want to stress one very important point. Few things stir up emotions as much as politics. When our preferred candidate wins, it’s easy to feel elation, or at least relief. But when our candidate loses, anger and fear are both natural emotions.
As you know, though, investing and emotion do not mix. So, we want to make one thing very clear: If you are happy with the outcome of this election, then we’re happy for you — but it’s not time to make dramatic changes to your investment strategy. If you are unhappy, then we give you our sincere condolences — but it’s still not time to make dramatic changes to your investment strategy.
Now, let’s examine why by looking at some of the ways a Biden administration may affect the markets. First, we’ll give a short primer on a few of Biden’s stated policies and how the markets may react to them. Then, we’ll discuss two important caveats that investors need to know. Let’s start with:
COVID-19 1
Back in March, Congress passed a bill known as the CARES Act. This provided trillions in stimulus for businesses and individuals impacted by the coronavirus. For months, the markets have been waiting on a second round of stimulus, but negotiations between Republicans and Democrats have routinely broken down.
On the campaign trail, Biden repeatedly stressed that addressing the pandemic would be his top priority as president. To that end, he has proposed enacting:
An emergency paid leave plan for sick workers or gig economy workers that will cover 100% of weekly salaries or average weekly earnings up to $1,400 per week.
New interest-free loans to small businesses impacted by the virus.
An expanded Paycheck Protection Program to help businesses pay their employees and avoid layoffs.
A Local Emergency Fund that provides states with more resources to expand hiring and unemployment benefits in hard-hit communities. It would also provide mortgage and rental relief for workers who lost their job or had their hours reduced.
These provisions would likely be part of a much larger stimulus package passed by Congress. It’s generally assumed that, now the elections are over and political posturing can die down a bit, Washington will find it easier to pass a new bill. The markets have reacted positively to almost any bit of news about a second round of stimulus, so it’s no surprise that stocks have risen sharply in recent days as Biden’s victory began looking more likely.
TAX POLICY 2
In 2017, Congress passed the Tax Cuts and Jobs Act, the most significant update to the tax code in decades. Tax rates decreased for most individuals, and corporations saw the largest one-time tax cut in U.S. history.
Biden’s plan is to keep those tax cuts in place for households making less than $400,000 per year. For those making more, he has proposed raising the top individual tax rate to 39.6% (up from 37%). Biden also wants to eliminate a 20% deduction on income from pass-through businesses, as well as limit certain itemized deductions.
For investors, the major item of note relates to capital gains. Specifically, Biden wants to increase the capital-gains tax rate to 39.6% for households with income exceeding $1 million.
On the business side, Biden’s plan calls for raising the corporate tax rate to 28%. He also favors imposing taxes on foreign income that U.S.-based multinational companies make.
There are some tax cuts to be found in Biden’s plan. For instance, Biden proposes “repealing the $10,000 cap on the state and local tax deduction and offering targeted tax credits for middle-income households.”2
We’re not going to give an opinion here on whether these tax changes are good or bad for the country. We will say that Biden’s tax policy is one area that makes the markets nervous, as investors generally favor lower taxes for both themselves and the companies they invest in. Indeed, Trump’s tax cuts was one of the big drivers of the historic bull market that dominated the first three years of his presidency. But there’s a big potential caveat here that makes reacting to these proposed changes premature. To put it simply, it’s unlikely Biden will be able to enact any sweeping tax changes. We’ll get to that in a minute.
THE ECONOMY 3
In the short-term, any stimulus bill Biden signs will make the biggest impact on the economy. Over the long-term, however, Biden has proposed policies he believes will both add more jobs and increase wages. Specifically, he wants to:
Increase the federal minimum wage to $15 per hour.
Invest $700 billion in American manufacturing and technology, with $400 billion going towards purchasing American-made goods.
Strengthen public-private partnerships with American manufacturers, with a goal of creating at least 5 million new manufacturing jobs.
Expand overtime pay for workers.
Market reaction to these proposals would likely be mixed. Some major employers would probably balk, which investors may not like. On the other hand, increasing the average worker’s take home pay could result in increased consumer spending, which is a critical component of our economy.
There’s a big caveat here, too, though. More on that below.
TRADE
Biden will likely reverse the nation’s trade policy. Rather than use tariffs, as President Trump has done, Biden prefers a multilateral approach to trade negotiations. This means building consensus with key allies, and then pressuring rivals like China to change their trade policies as a bloc rather than going it alone.
The markets have taken a dim view of the trade war with China. It was never enough to derail the bull market – it took COVID-19 to do that – but it did lead to periods of volatility from time to time. Biden’s more moderate “free trade” approach may be more to the market’s liking.
TWO CAVEATS
As you can see, certain aspects of a Joe Biden administration could be net positives for the markets. Others may be negatives. But there are two big caveats here. Two reasons why we shouldn’t make wholesale changes to our investment strategy just because of the election.
The first caveat has to do with the prospect of a divided government. For the next two years, Democrats will have control over the White House and the House of Representatives. The Senate, however, is still up in the air.
Republicans have enjoyed a majority in the Senate for the last six years. Going into this election, Democrats needed to gain three seats – assuming Biden won the presidency – to flip the Senate. But they were only able to gain two. They also lost a seat.
As of this writing, both parties control 48 seats each.4 There are four seats yet to be called. Two of those four are projected to be won by Republicans. The other two seats, however, will likely be decided in runoff elections, meaning we won’t know the winners until January. If Democrats win both those seats, the final count will be a 50/50 split, with Vice President-elect Harris serving as the tiebreaking vote. But if they don’t, the Republicans will enjoy their Senate majority for another two years.
This is critically important! If Republicans do retain control of the Senate, we will have a divided government. Biden will have to negotiate with Republicans to get legislation passed, which means many of his policies – especially those relating to taxes – will need to be watered down or even shelved. That’s why we should adopt a wait-and-see attitude when it comes to Biden’s administration. We have no way of knowing exactly what legislative changes he’ll be able to pass. In all likelihood, they will be modest. That means the status quo will be largely maintained.
Here’s the second reason we need not overreact to the election results. History has shown us that the presidency – indeed, the government itself – has far less of an impact on the markets than people think. Here are some numbers for you to digest:
On average, the S&P 500 goes up 10.8% under Democratic presidents and 5.6% under Republicans. Either way, the markets have risen over time.5
Historically, when the same party controls both Congress and the White House, the average return on the S&P 500 was 7.45%.5
When power is split and the government is divided, the average return was 7.26%.5
Since 1929, the S&P 500 has risen 13% on average when a Democrat is in the White House, but Republicans control the Senate. 5
These numbers illustrate an important truth: The stock market isn’t driven by one person or one party. It’s driven by the ebb and tide of trade. By the law of supply and demand. By innovation and invention. By international relations and consumer confidence.
The market is an ocean – and politics but a single tributary emptying into the vast, ever-changing sea.
Now, you’ve heard us say it before, but we’ll say it again: Past performance does not guarantee future results. What past performance does do, however, is show us why overreacting to elections and headlines is such a bad investment strategy. When we do that, we are investing based on either emotion or guesswork. Neither are suitable replacements for actual planning.
Here at MinichMacGregor Wealth Management, planning is what we do.
So, what’s the takeaway? The takeaway is that you might be happy Biden won, or you might be scared. Both are perfectly normal, legitimate emotions to feel. But neither emotion will drive our planning. Some of Biden’s policies will affect the markets positively. Others will be negative. Some will have no effect at all, as they’ll be swallowed up by the endless waves of news that investors react to over the next four years. So, rather than change our investment strategy, we’ll continue to:
Determine how much you need to reach your financial goals.
Determine how much risk we must take on to help you get what you need.
Position ourselves to take advantage of future market growth, while preparing to weather future market volatility.
In other words, we’ll continue working towards your goals by relying on planning. Not politics.
Pandemics and protests. Wildfires, market crashes, and a recession. If someone ever tries to tell the story of 2020 on film, it will take more movies than Star Wars. At one point, we even had to worry about murder hornets. Murder hornets!
There’s no question this year has been a crazy one. But it’s about to get even crazier – because a new presidential election is less than one week away.
Over the last few weeks, several clients have asked us what the election could mean for the markets. At a time when there is so much uncertainty to deal with, the thought of adding an election to the mix can seem overwhelming. So, we thought we’d write about how we should prepare for both the run-up and aftermath of the election. What exactly does the upcoming election mean for the markets?
Short-Term View: Prepare for Volatility
Uncertainty. That’s the keyword. Investors hate it, the year has been full of it, and the lead-up to a presidential election just brings more of it. As a result, the markets often see increased turbulence in the month before an election. For example, in October of the last four presidential election years, the markets fell.1
We don’t ever try to predict the future, but we should be especially prepared for volatility this year. That’s because there are still so many question marks surrounding our economy and the pandemic. For example, the pandemic is showing no signs of stopping, and indeed cases may climb again as winter sets in. The economy has improved, but is still on thin ice, with unemployment rates still stubbornly high. Investors are watching Congress with bated breath, waiting to see whether they’ll enact a new stimulus package. If not, that could spell trouble, as many economists believe more stimulus is needed for the economy to recover.
But there’s another reason why we should prepare for volatility: The possibility of delayed – or worse, disputed – election results.
Thanks to the pandemic, more people are likely to vote by mail than ever before. Mail ballots take longer to count than traditional ones, and some states “will count ballots that are delivered after the election if they are postmarked by a deadline.”2 Because election officials are more concerned with counting votes correctly than quickly, we may not have a winner declared for several days or even weeks. In fact, earlier this year, during primary season, several states needed more than a week before they could declare a winner.
Remember, uncertainty is the key word. Any delay may well cause more of it, which could trigger volatility. Then, too, some politicians have cast doubt over the very idea of mail ballots. If the losing candidate feels there is ground to contest the results, that could delay the process even further, leading to – you guessed it – more volatility.
We don’t have to look far back in history to see what the markets did the last time results were delayed. Remember the drama surrounding the 2000 election? On election night, Florida’s results were considered too close to call. Over the next month, Americans learned more than they ever wanted about things like dimpled chads and butterfly ballots. The S&P 500, meanwhile, dropped over 8% between election day and December 15 when the result was finally decided.3
Now, none of this is to say that pre- and post-election volatility is guaranteed. It’s not. We should, however, prepare ourselves for it. Because the more mentally prepared we are to weather short-term uncertainty, the better equipped we are to remember…
The Long-Term View: Patience Over Politics
Every four years, we hear people say, “If the Democrats/Republicans win, we’re going to sell (or buy) because that means the markets will fall (or rise).” It is understandable why people think this way. After all, politics play an increasingly large role in our daily lives. Why wouldn’t they impact our portfolio, too? But the truth is, presidential elections are relatively unimportant when it comes to the markets, at least in the long-term. A quick look at history bears this out.
Historically, the S&P 500 has gone up 10.8% under Democratic presidents and 5.6% under Republican presidents.4 That’s not a large difference and can be attributed to a whole range of factors besides politics. Either way, the markets tend to go up over time.
One thing we’ve noted in recent years is that as elections get more partisan, so too does the rhetoric about how the candidates will impact the markets. For example, here’s the opening sentence from a CNBC article published on November 3, 2016, shortly before the election:
Wall Street’s long-running view that Hillary Clinton would easily become the next president has been replaced by a new fear that Donald Trump could win, and it probably won’t be a pretty picture for stocks if he does.5
Here’s a snippet from an article in the New York Post written a few months before Barack Obama was first elected:
…it’s hard to see how a President Obama would be good for Wall Street. He wants to raise the capital-gains tax…[which] would be great for the tax-shelter business, but stocks would tank…in other words, the markets could fall further from their already-beaten down levels once the street begins to focus on an Obama presidency.6
Both these predictions ended up being wide of the mark. In the first year of President Obama’s presidency, the markets rose 23.45%.6 In President Trump’s first year, the markets gained 19.42%.7 Doom and gloom is predicted more and more with each election and yet the markets keep going up over time.
This is exactly why we are long-term investors. As the saying goes, it’s not about timing the market. It’s about time in the market. This is why making investment decisions based on politics just doesn’t make sense. As you already know, emotional decision-making has no place when it comes to investing. But few things prompt as much emotion as politics. That’s why it’s crucial that we keep politics out of your portfolio.
It’s true that Trump and Biden have different economic policies, and some of their policies will affect the markets to a degree. But the markets are like the world’s most complicated cake recipe, and the president is just one relatively minor ingredient. Far more important are supply and demand, innovation and invention, mergers and acquisitions, the ebb and tide of trade, and a host of other economic developments both large and small. Making major investment decisions based on politics would be like carefully measuring how much chocolate goes into your cake while ignoring the amount of sugar, flour, and eggs.
So, what does the election mean for the markets? In the short-term, potentially a lot. In the long term, probably not much.
2020 has been a long, crazy year. It’s possible the next few months could be even crazier. But in the grand scheme of things, they are still just a few months, and this is still just one year. We’ll be investing long after Trump and Biden are both names in the history books.
In the meantime, our team is here for you to answer your questions. Please let us know if we can be of service. Be well, stay safe, and enjoy the rest of your year!
It’s that time again! Every four years, Americans take a few minutes out of their day to choose the next President of the United States. Under normal circumstances, voting is a simple, uncomplicated act—but the months preceding it are anything but. After all, before we vote, we first have to endure the dreaded “campaign season.” From endless televised debates to the plethora of signs on our neighbors’ lawns, “politics” becomes the order of the day.
If you’re like us, you probably don’t enjoy all the campaigning. But you also know how important the political process is. Being an informed, engaged citizen is crucial to maintaining the stability of our Republic. That means asking some pretty tough questions, like: “Which candidate best represents my opinions and values?” “What will each candidate do to ensure both our safety and our personal liberties?” Getting the answers can be both frustrating and time-consuming.
Fortunately, there’s one question you don’t have to ask.
“How will the election affect the markets?”
This is a question we get every four years. This year, we thought we’d make life a little easier for you by answering it now. That means you have one less question to worry about!
So, how do elections affect the markets? The answer is:
Not much.
Since 1957, the S&P 500 has gained an average of roughly 9.8% every presidential election year.1 Of course, there can be some massive exceptions. For example, in 1928, the S&P rose over 37%. In 2008, it fell over 38%.2
But there’s a danger in using averages to try and predict what will happen. Take the “Presidential Election Cycle Theory” for instance. Once upon a time, many people believed that U.S. stock markets are always the weakest in the year following a presidential election. This was the case for Franklin Roosevelt. It also held true for Truman and Eisenhower.
But in George H.W. Bush’s first year, the S&P 500 rose 27%. In Bill Clinton’s first year, it rose 7%. Barack Obama’s first year saw a 23% rise. Donald Trump’s first year was 19%.
It’s clear that the “Presidential Election Cycle Theory” just doesn’t hold water. And that’s true for actual election years as well. An average merely shows you what has happened, not what’s going to happen. (Side note: this is why you often see the financial industry emphasize that “Past performance does not guarantee future results.” Because it’s true.)
“But what if the Democrats/Republicans win? Won’t that have an effect?”
That’s the next question we get every four years. Our answer:
Not really.
Don’t believe us? Let’s take a little quiz. Below are the last eight presidents of the United States, with their political party next to their name. (We’re skipping Ford as he took office in the middle of Nixon’s second term.) Look at each name and guess whether you think the S&P 500 went up or down during the first year of each president’s term. Write your guess in the space provided, if you like.
President
Party
Markets Up or Down?
Richard Nixon (1st term)
Republican
Richard Nixon (2nd term)
Republican
Jimmy Carter
Democrat
Ronald Reagan (1st term)
Republican
Ronald Reagan (2nd term)
Republican
George H.W. Bush
Republican
Bill Clinton (1st term)
Democrat
Bill Clinton (2nd term)
Democrat
George W. Bush (1st term)
Republican
George W. Bush (2nd term)
Republican
Barack Obama (1st term)
Democrat
Barack Obama (2nd term)
Democrat
Donald Trump
Republican
Now, maybe you’ll score 100% on this quiz. But we’re willing to bet at least a few of the answers will surprise you. Speaking of which, here they are.2
President
Party
Markets Up or Down?
Richard Nixon (1st term)
Republican
-11.36%
Richard Nixon (2nd term)
Republican
-17.37%
Jimmy Carter
Democrat
-11.5%
Ronald Reagan (1st term)
Republican
-9.73%
Ronald Reagan (2nd term)
Republican
+26.33%
George H.W. Bush
Republican
+27.25%
Bill Clinton (1st term)
Democrat
+7.06%
Bill Clinton (2nd term)
Democrat
+31.01%
George W. Bush (1st term)
Republican
-13.04%
George W. Bush (2nd term)
Republican
+3.0%
Barack Obama (1st term)
Democrat
+23.45%
Barack Obama (2nd term)
Democrat
+29.6%
Donald Trump
Republican
+19.42%
If a hypothetical investor had followed the “Presidentical Election Cycle Theory”, he or she would have missed out on some of the biggest gains in market history. The same is true if that hypothetical investor had made decisions based on politics. Convinced Democrats are terrible for the country? Fine, but have fun missing out on Clinton’s second term. Can’t stand Republicans? Okay, but too bad you didn’t catch the train between Reagan and the first Bush.
As worked up as we often get about our political beliefs, neither party tends to have that much impact on the markets compared to the other. Historically, the S&P 500 has gone up 10.8% under Democratic presidents, and 5.6% under Republican presidents.3 That’s not a large difference and can be attributed to a whole range of factors besides politics. Either way, the markets go up over time. That’s because the markets are driven by far more than just one person or event.
Obviously, it matters a great deal who our president is … but not when it comes to the markets. And that’s a good thing! Here’s why:
The Founding Fathers created a system of government where no branch (executive, legislative, or judicial) was supposed to dominate the other. The fact that neither political party, nor election years in general, have that much influence on the markets shows that our system of checks and balances extends to investing, too.
Again, the markets are driven by far more than just one person or event. They’re controlled by the ebb and tide of trade, by the law of supply and demand, by innovation and invention, by international conflict and consumer confidence. The markets are like life. The course our lives take isn’t determined by one gigantic decision, but by the millions of small decisions we make every day.
We don’t know about you, but we find that comforting.
So, what’s the takeaway from all this? The takeaway is that when it comes to investing, we control our own destinies, not politicians. The way to reaching your financial goals is by having a sound investment strategy, making informed decisions, and taking emotion out of investing. Not by worrying about the election.
So this year, as you watch the debates, chat amongst your friends, and decide who you want the next president to be, you can do so with the knowledge that whatever happens, the markets will go their own way … and so will you.
On behalf of everyone here at Minich MacGregor Wealth Management, we wish you a happy (and headache free) election!
Speed bump, stop sign, or red light? That’s the question investors are asking.
Let us explain. After cruising for the past five months, the markets screeched to a halt on September 3rd. The Dow dropped over 800 points, and the Nasdaq plunged nearly 5%.1 All told, it was one of the worst trading days for stocks since the pandemic-driven panic of March. The volatility continued the next day, albeit at lower levels.
So, what does it mean? Was Thursday’s selloff just a short-term blip – the equivalent of hitting a speed bump? Or was it the beginning of a market correction? If so, how long of a correction? Are we merely coming to a stop sign, or will we hit a red light?
Unfortunately, market signals are never as easy to interpret as road signs. But as we start winding down this bewildering year, investors will be gripping their steering wheels ever more tightly. That’s because they’re all trying to determine whether the markets will end the year on cruise control…or in full reverse.
Whenever you drive to a destination, it’s always good to familiarize yourself with the road beforehand. So, as this crazy summer draws to a close, let’s look at the different scenarios we could experience over the next few months. As a heads up, we’re going to cover a lot of ground in this message. We believe two of our most important responsibilities are to keep you informed about what’s going on in the markets and prepared for what may come in the future. In this message, we will try to do both. Let’s dive in!
Speed Bumps
Between April and May, all three major US stock indexes — the Dow, the S&P 500, and the NASDAQ — climbed for five consecutive months. The S&P 500, for example, rose 60% over that period.2
Every so often, though, the markets experience a dramatic one- or two-day selloff. When those selloffs come during the middle of a major rally, like the one we’ve been experiencing, investors wonder whether it’s the beginning of a market correction. (A correction, remember, is when the markets fall at least 10% from their recent high.)
Market corrections are relatively common. On average, we’ll see one at least once every 1 to 2 years.3 But more often, these selloffs are not the beginning of anything at all. They are simply speed bumps, and while they may seem random, there are usually underlying reasons for them.
For example, let’s take what happened on September 3rd and assume it’s only a speed bump. Why did it happen? A closer look at which stocks fell may provide some answers. Specifically, tech stocks, including big names like Apple and Facebook, were the ones that suffered the most – just as those same stocks have largely fueled the markets rally. (More on this in a moment.) There are a few possible reasons for this. One is that many investors may simply have been cashing out of tech stocks to realize their gains. Another reason is that, because prices for tech stocks have risen so high, many traders may feel there’s simply no justification for plowing more money to them. When that happens, traders and short-term investors often move their money into other sectors they feel are undervalued.
In other words, the shudder that went through the markets is like the one you feel when changing gears in an old car. If that’s the case, the selloff was likely just a speed bump. A short pause for investors to take a breath before the markets resume their climb.
Here’s another reason why many selloffs are just speed bumps: The Federal Reserve. After the country went into lockdown, the Federal Reserve did many things to prop the economy.4 First, they lowered interest rates to historic lows. This was to lower the cost of borrowing on mortgages, auto loans, home equity loans, and others — a key step to keep the economy moving. Second, the Fed launched a massive bond-buying program. This is another way to keep interest rates low. The Fed has also been lending money to securities firms, banks, major employers, and some small businesses using a variety of means.
These are all familiar tactics for anyone who was paying attention during the Great Recession. Then, as now, the Fed’s actions indirectly propelled the stock market. That’s because lower interest rates prompt increased spending, which in turn causes stock prices to rise.
As long as the Fed keeps its stimulus programs in place, stocks will continue to be one of the most attractive places for people to put their money. And since the economy remains on very shaky ground, it’s unlikely the Fed will pull back any time soon. “Don’t fight the Fed,” investors are often counseled. Thanks in large part to the Federal Reserve, the stock market continues to be the shortest, surest road for investors to travel. That’s why many selloffs are nothing more than speed bumps.
Stop Signs
Of course, sometimes a selloff is more than just a speed bump. Sometimes, it’s like a neon light flashing: stop sign ahead.
When this happens, Wall Street-types like to call it a market correction – a decline of 10% or more from a recent high. There are many reasons why corrections occur. One thing many corrections have in common, though, is they come after months of major market growth. When prices rise extremely high, extremely fast, it’s as if the markets have “overheated” and need to cool off.
It wouldn’t be a surprise if that’s what we’re seeing right now. Again, the S&P 500 rose 60% between March 23rd (its most recent low) and September 2nd (its most recent high).2 In that same period, the tech-heavy NASDAQ rose roughly 75%!5 Those are staggering numbers. One could argue we’re overdue for a correction.
Speaking of tech-heavy, let’s talk about technology stocks for a moment. When the markets plummeted in March, these stocks were one of the few safe havens around – and they’ve also been the best performers since then. That’s no surprise. At a time when most Americans were largely confined to their homes, it was our technology – from our iPhones to Zoom, from Google to Netflix – that kept us entertained and connected. But remember how we said the S&P rose 60%? Peek under the hood and you’ll see those numbers were driven by two sectors: technology stocks and consumer discretionary stocks. (Think Nike, McDonald’s, Home Depot, etc.) Other sectors either performed much lower or are still in the red. So, when we say the markets have recovered well, what we’re really saying is that the top sectors have performed enough to make up for those still struggling.
It’s one of the many reasons the stock market simply isn’t a reliable barometer for the overall economy.
What does this have to do with a market correction? A lot, actually! It’s all thanks to these two terms: capitalization and weighting. Remember, the S&P 500 is an index, not the actual stock market itself. It’s essentially a collection of the five hundred largest companies listed on U.S. stock exchanges, which is where stocks are traded. More specifically, the S&P is a capitalization-weighted index. Without getting too technical, that means the largest companies make up the largest percentage of the index. For example, Amazon, Apple, Microsoft, Facebook, and Google – just five companies – make up 20% of the index!6
Look at that list of companies again. Notice anything about it? Yep, you guessed it: four of them are tech companies. In fact, if we break down the S&P 500 by sector, you’d notice that technology dominates the S&P 500. Actually, let’s do that right now!7
Sector
Weighting
Information Technology
27.47%
Health Care
14.63%
Consumer Discretionary
10.83%
Communications
10.78%
Financials
10.09%
Industrials
7.99%
Consumer Staples
6.97%
Utilities
3.07%
Real Estate
2.84%
Energy
2.82%
Materials
2.52%
As you can see, the S&P 500 is currently overweighted to technology stocks, to the tune of 27.4%! So, if tech stocks were to endure any type of prolonged selloff, that would have a major impact on the S&P 500 as a whole – and could well lead to an overall market correction.
Red Lights
Some market corrections only last a few days or weeks. When that happens, it’s like coming to a stop sign. A brief pause, and then we continue our journey.
But some corrections last longer than that. According to one report, the average correction lasts around four months. When that happens, it’s more like hitting one of those annoyingly-long red lights, just as you’re heading home and the sun is in your eyes. The kind that makes you think, “What does the universe have against me today!?”
Before we go on, note that we’re not predicting that is what’s happening here. We don’t try to predict the future – that’s a game for fortune-tellers. Instead, we try to prepare for the future. And to be frank, it’s possible we could see a longer correction in the not-to-distant future. That’s because the future contains a lot of question marks, any of which could prompt the markets to pull back.
For starters, there’s the economy. While the markets enjoyed a V-shaped recovery after March, the overall economy has not. Things are improving, but still a long way from healthy. For example, the U.S. added 1.4 million jobs in August alone…but it’s still down 11.5 million jobs since the pandemic began.8 In other words, things are much less bad than before – but they’re still historically bad. The markets have hummed along despite all this, but at some point, it’s possible the economic reality could drag stock prices down.
At the same time, we’re seeing renewed Trade War fears with China. We’re also only two months away from a bitter presidential election. Historically, the markets don’t really care who sits in the White House, so there’s no reason you should let the election impact your financial thinking. (We’ll have more information on this in the coming weeks.) But in the runup to the election, we can certainly anticipate more volatility as people worry about who will win and what it means.
And of course, there’s COVID-19. We’re all sick of hearing about it, but it’s still a fact of life and will continue to be so for some time. Should cases surge in tandem with the upcoming flu season, the markets may retract into their shell.
In short, it’s certainly possible that we see a market correction over the next few months. But whether we do or not, it’s important to remember that corrections are inevitable and temporary. Corrections can even create opportunities for the future, as they open the door for investors to pick good companies at lower prices.
So, what do we do now?
Remember: We can’t predict the future. But we can prepare for it.
The fact is, we’re on a road we’ve never been on before – as investors and as a country. In real life, whenever we drive on an unfamiliar road, we drive cautiously, keeping our eye out for hazards. The same is true with investing. Speed bumps are only an annoyance when we go over them too fast. Stop signs and red lights are only dangerous when we speed past them. That’s why we use technical analysis to determine which the way the markets are trending. By doing that, we can spot these roadblocks ahead of time and slow down (or pull off to the side of the road) accordingly.
Unlike buy-and-hold investors, we don’t need to fear the occasional bout of market volatility. Because we follow set rules for when to enter and exit the markets, we don’t mind stopping occasionally. We are prepared to play defense or even move to cash at any time. That’s what helped us when the markets crashed in March. It’s what will help us moving forward.
Should a downturn happen, our clients’ portfolios are prepared. Now we just need to prepare ourselves mentally and emotionally in case there are stop signs and red lights ahead. And if it turns out to be a speed bump? That’s fine, too. We were already driving the speed limit.
As always, our team will keep a close eye on the road ahead. In the meantime, enjoy the end of your summer! Please feel free to contact us if you ever have any questions or concerns. We are delighted to be of service in any way we can.
Labor Day is coming up! Normally, we’re used to celebrating it with parades, barbecues, and sometimes, fireworks. Unfortunately, for this Labor Day, we will have to go without the traditional celebrations. But we think we can speak for everyone when we say we deserve a holiday – even if we can’t observe it in the usual way. So, as we approach Labor Day, let us pause and reflect on the circumstances that make this year’s holiday unique.
As you know, this year has put our workforce to the test – the essential worker and the unemployed alike. Amid the COVID-19 crisis, we are recognizing more and more that labor is what holds our communities together. Billboards recognizing the workers who maintain our essential infrastructure are replacing advertisements. TV spots thanking the doctors, nurses, and other medical professionals working on the frontlines are replacing commercials. Parents taking on the extra labor of homeschooling their children feel more appreciation for teachers and school workers than ever. And many of those lucky enough to stay employed during this time are doing everything they can to help out those who aren’t. This has been a challenging time, but because we are all pulling through it together, we know there are better days ahead.
And we know that it’s our workers who will help us get there.
Of course, when and how we return to a normal, flourishing economy is uncertain. What is certain is that we will. We can be certain because our workforce is nothing if not resilient and eager to move forward.
We believe the pride and determination in our workforce is an inherently American trait. That’s how President Grover Cleveland saw it. In his presidential nomination acceptance in 1884, he wrote these words:
“A true American sentiment recognizes the dignity of labor and the fact that honor lies in honest toil.”1
Ten years later, he made Labor Day a national holiday.
One-hundred and twenty-six years later, we honor laborers past and present. Every day we work to better ourselves, our community, and our nation, is a day to celebrate. That includes yourself, those you depend on, and those who depend on you.
So, even though we can’t celebrate Labor Day in the usual way this year, it’s still a day worth celebrating. Because it’s not just about the end of summer. It’s about ourselves and our community. It’s about recognizing everything we’ve gone through and everything we’ll do. It’s about recognizing that, no matter what happens, we’re in this together.
We think that’s worth celebrating. Don’t you?
So, however you celebrate, we wish you and yours a very happy Labor Day!
1 Grover Cleveland, “The Public Papers of Grover Cleveland: Twenty-second President of the United States”.
These days, most people can’t afford to reach their financial goals – like retirement – on their employment income alone. The cost of living is simply too high. That’s why investing is so important: Because it allows you the opportunity to put your money to work for you. Through investing, you can potentially grow your money and seize opportunities for additional income.
But it’s not enough to simply throw your money at the stock market. You must invest wisely if you’re to reach your financial goals. You must be a financially savvy investor.
To help, we’ve created a special infographic called Four Steps to Becoming a Savvy Investor. Please take a minute to look it over. These steps are all very simple to understand, but they’re critically important. If you have any questions about them, or if you need any help applying them, please contact us for further information.
We hope you find this infographic helpful. Again, please contact us if there is anything we can do to help you invest for your future.
