We have arrived at the time of year where a few things are certain. The air around us will become cooler, days will become shorter, flu season is near and the holidays are fast-approaching. This year will look different than last, as we continue to navigate our lives during a pandemic, global recession, and what just so happens to be an election year. The familiarity of this season seems to be overshadowed by the uncertainties of what is to come. Will there be a vaccine for coronavirus soon? How will the results of the upcoming election affect the future? What will the winter months look like during a pandemic? The dichotomy between a still-struggling economy and a recovering stock market, makes this time a bit more complicated.
We have made it through 7 months of uncertain times. We have survived government mandated stay-at-home orders, a transition for many to working remotely, and minimizing interactions with others. As a society, we are resilient, so in a time where uncertainty may feel overwhelming—we know we will see the other side!
An Economy on the Mend
The coronavirus recession has been financially devastating for many Americans, but it also has been advantageous for others. Many people found themselves out of work and worried about paying their mortgage or rent, while others are paying down debt or buying second homes. Small business closings seem to be popping up left and right, but companies like Amazon and Microsoft are prospering. The contrast of this recession has intensified the disparity between those who are financially stable and those who struggle to pay their bills.
The good news is that we are slowly but surely seeing improvements in our current economy. The Wall Street Journal reports that the initial jobless claims have declined from nearly 7 million at the end of March to less than 1 million claims in mid-September. As shown below, there has been a slow recovery in the job market as approximately 11 million jobs have returned since the initial round of layoffs.
Although we have not returned to employment levels pre-COVID, the steady improvements in the job market have put money back into the economy and kept many households afloat.
For those with a healthy financial picture prior to COVID, the combination of having fewer places to spend money, less travel, and low interest rates has created opportunities to improve their financial picture. Home improvement projects are ramping up with many spending most, if not all their time at home. RVs are hard to come by as many travel buffs focus on domestic exploration. Low interest rates have pushed home sales through the roof and refinancing is creating additional household cash flow and opportunities to pay down debt.
Although there is a slow revival of the U.S. economy, the return to “normal” relies heavily on the production of a safe vaccine for COVID-19. Even when the vaccine is produced, it will take time to distribute to the masses. Until that time, the economy will continue to be supported by consumer spending and government monetary support. As the U.S. economy is awaiting a vaccine, the equity market is looking to the future.
The Stock Market is Singing a Different Tune
While the economy has been making a slow recovery, the stock market has put the pedal to the metal. The momentum in the equity market has pushed the S&P 500 index to new heights, reaching a new all-time high at the end of August. While uncertainty surrounding a COVID vaccine hinders the economic recovery, predictions of a vaccine, along with momentum in a small number of stocks has driven the market to a V-shaped recovery. It feels strange to have such a divergence between the economy and market, but we have been here before. This is the fifth time in history the market has hit an all-time high while the economy was still in a recession. Momentum can power the stock market beyond fundamental support, which is what we are seeing currently.
It should be noted that this momentum is not universal throughout the entire stock market. Made up of the U.S.’s top 500 stocks, the S&P 500 index’s returns have been propelled by the top 5 companies: Apple, Microsoft, Amazon, Facebook and Google. The graph below shows that while the top 5 stocks are showing a combined return of 28.8%, the remaining 495 companies are negative for the year. The concentration in these companies creates exposure to risk in portfolios so maintaining a diversified portfolio remains important during this time.
Source: Charles Schwab
Mailing it in: Election Day
One of the main questions we receive as financial advisors as an election approaches is: “How should I prepare my portfolio for the upcoming election and how could the results affect my investments?” Our goal in answering these questions is to remind investors that indulging political fears or expectations by making changes to your investments can be damaging to long-term goals. The culmination of a pandemic, global recession, and an election creates a tornado of uncertainty, which makes keeping emotions and political views at bay more complicated for investors.
Rules of Thumb During Election Season:
Managing your finances can be challenging, especially during times where things seem out of your control. Here are a few guidelines for investors to remember as we approach November:
- Prepare for Volatility
Following the 2016 election, the S&P 500 fell more than 5% in premarket trading, halting the market until the flurry of emotions calmed down. By the time the market closed that day, the index was up over 1%. Every election is different, and it is common to see increased volatility in the stock market heading into and following an election. It is important to remember that it is temporary and to not let these market reactions influence your long-term thinking.
- Turn off the TV
Headlines are created to grab your attention and news outlets want your clicks for advertisement dollars. Keep all of this in mind as we approach November and don’t let the headlines influence your investments!
- Focus on What You Can Control
Predictions, assumptions, and polls give the public a false sense of control during elections, but outcomes are always uncertain. Turn your focus on what you can control in times of uncertainty to help avoid emotional reactions.
- Keep Your Eyes on the Long-Run
Whether it’s COVID, the election, or the cold winter months—this too shall pass. Remain focused on your long-term goals!
We have been through a lot as a society in 2020. It has been a year like no other and with continued uncertainty surrounding coronavirus vaccines and election results, it is important to remain focused on what you can control because one day, hopefully in the near future, we will be back to the hustle and bustle of our day-to-day lives with busy schedules, airplane rides and much, much more.