Things to watch for in 2020
Written by Philip Lockwood
Donkeys, elephants, bears, and bulls: Why who is in the White House may matter less than you think
What does history teach us about elections? Though the past doesn’t predict the future, we can learn valuable lessons from how markets have behaved around elections in the past.
As you can see by the chart above the market has only been negative during 2 of the last 16 elections. Despite some volatility, election years have historically been positive for the stock markets. The two negative years were in 2000 during the dot-com crash and in 2008, we had the financial crisis and the beginning of a recession.
Past performance in the market when a particular political party is in power does not mean the same results will occur the next time that party is at the helm. In fact, this is one of the most common misconceptions about politics and the market. Stocks have done well in the long term with a mix of Democratic and Republican presidents
A hypothetical $10,000 investment in the S&P 500 Index in 1961 would have grown to nearly $3 million as of 6/30/2019
Election cycles, especially recent ones, are fraught with misperceptions, personal biases, and bad information. Dire predictions that a candidate’s policies will negatively impact a particular sector often prove to be wrong. President Obama’s healthcare law was expected to harm the healthcare sector, and healthcare stocks sold off as a result. In reality, the healthcare law created a set of winners and losers within the sector that astute investors were able to capitalize on.
The president is one of many factors that influence the market and other influences may be stronger. Macroeconomic (macro) factors, such as interest rates, inflation, economic outlooks, changes in policies, and wars, may have more impact than who resides in the White House
Rather than trying to time the market around an election or political party, a diversified portfolio can help you build long-term wealth regardless of who is in the White House.
The Debt Market
Risks lurk in the shadows of a 2020 outlook for steady growth. Debt is one of them: Former Fed officials are among those warning of dangers of a prolonged period of easy policy, which can increase investors’ appetite for riskier and higher-yielding assets (Junk Bonds).
Low-quality U.S. corporate debt (i.e the Junk Bond Market)
When we examine the issuance of low-quality corporate debt in our last recessionary period, we find that U.S. companies issued over $950 billion in junk bonds in 2008. To put that in perspective, they have issued over $1.3 trillion in 2017 alone, we had as much subprime corporate debt as quality debt. (Wall Street Journal Sept 7, 2018 What will trigger the next crisis?) We are seeing many of these debt issues because of the low interest rate required to service this debt. These companies are getting hooked on leverage. It is cheap. It is easy to refinance. So why not take more of it? These companies have been lulled into taking more leverage than they can handle. This is something I will be keeping a close eye on in 2020.
How big of an impact could it have on your portfolio
As of Feb 14, 2020 we are up to 64,000 confirmed cases with nearly 1,400 deaths. A group was recently removed from a cruise ship and sent to Omaha, Nebraska. The virus certainly has the potential to limit growth of companies specifically those that do business in China. Based on the closure of many businesses in China that alone may have an effect on the numbers for these companies. Whether it is Apple doing business in China who released a modification to their growth projections today (2/18/20) or General Motors who sells more cars in China than they do in the United States. We can assume there will be an economic impact of coronavirus on global GDP. Time will tell how severe this virus is and how long this virus will be going around. There are many variables to consider when discussing this global impact on your portfolio. Many of the larger publicly traded companies have already updated their guidance with the expectation of negative effects of the coronavirus. One difficult part is figuring out how forthcoming China has been with their numbers of reported cases, casualties, etc. One thing I am doing as a financial advisor is monitoring portfolio’s for companies that do much of their business in China and monitoring the impact that the virus may have on their quarterly numbers. The other option is to lessen or eliminate geographical risk by owning companies that do not have exposure to China and thus would have a limited impact. Many of the media pundits are comparing coronavirus to SARS when in reality coronavirus has spread much faster than SARS ever did.
*Source: Guggenheim investments, China National health Commission, Wind. Data as of 2.12.2020
The already-terrible human impact of the virus has the potential to become more tragic, but the economic impact will be significant even if its progress can be impeded. The impact on corporate profits and free cash flow cannot be overlooked. The effect on oil and energy prices could turn out to be more extreme. We already have excess oil production in the world. As demand dries up from the virus repercussions, oil could see a significant plunge unless OPEC or other producers decide to cut production. Scott Minerd, the CIO of Guggenheim Investments, had a salient point about equity and bond prices: “Yet as a major economic problem looms on the horizon, the cognitive disconnect between current asset prices and reality feels like the market equivalent of “peace for our time.” The average BBB bond yields just 2.9 percent. A recent 10-year BB-rated healthcare bond came to market at 3.5 percent and subsequently was increased in size from $1 billion to $1.7 billion due to excess demand. For those investors who perceive the disconnect between risk assets which are priced for a rosy outcome and the reality of the looming risks to growth and earnings, any attempt to reduce risk leads to underperformance. It is a mind-numbing exercise for investors who see the cognitive dissonance. The frantic race to accumulate securities has cast price discovery to the side.”
Now that I have addressed the topics on my radar in 2020 what is next? The next step I would take is to revisit your appetite for risk. Either look at your portfolio or sit down with your advisor to look at your portfolio and make sure you are aware of the level of risks you are taking. Make necessary adjustments not out of fear but out of bringing your portfolio back into alignment with your financial plan.
For anyone who would like a free risk assessment of their portfolio they can click on the Hyperlink below to take a quick risk quiz to help determine your appetite for risk:
Once we receive the information my office will reach out to you to perform an assessment of your current portfolio to dial in on the level of risk you are taking and how that measures up with your appetite for risk. It is that simple. I may offer a suggestion to bring your portfolio closer to alignment, but we will not continually pester you. This is to important of a task to put off.
Times like this it can highlight the importance of a financial plan tailored to your individual situation and a portfolio that coincides with your risk tolerance. Whether you are want to manage your portfolio yourself, keep your current advisor or look at making a change I hope everyone takes me up on this offer.
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Content intended for educational/informational purposes only. Not investment advice, or a recommendation of any security, strategy, or account type.
|Philip Lockwood | Founder + Managing Partner|
|Address: 3100 Ingersoll Ave. Des Moines, IA 50312|
Website: Lockwood Financial Strategies
Securities offered through Parkland Securities, LLC, member FINRA (FINRA.org) and SIPC (SIPC.org). Investment Advisory services offered through SPC, a Registered Investment Advisor. Lockwood Financial Strategies, LLC is independent of Parkland Securities, LLC and SPC