These days, everything from sports to pandemics to climate change has become dogmatic and politicized. Alas, politics has seeped into investing more than ever before. And while a regime change at the White House will very likely bring real policy change and planning opportunities, its impact to investing is overstated.

2020

Let's look back at 2020 market predictions. From thestreet.com in December of 2019:

"The trade war is still the biggest question facing investors, but "with markets where they are currently, it seems most are optimistic there's a resolution coming," Grace said. "The actual details of the deal matter. China can buy more agricultural products and that's great for U.S. farmers, but it doesn't solve any of the more structural issues that got us here in the first place."

"Investors should modify their expectations for returns in the equity markets in 2020 because of political uncertainty in the U.S. and abroad, slowing corporate earnings growth, China trade uncertainty and the lessened likelihood of future rate cuts by the Federal Reserve, said Robert Johnson, a finance professor at the Heider College of Business at Creighton University in Omaha, Nebraska. The likelihood of a recession in the U.S. is not on the near-term horizon based on recent economic indicators, Johnson said. Investors need to keep an eye out for slower corporate earnings growth because it will likely put a damper on equity returns in 2020." 

From the Barron's 2020 Outlook, also written in December 2019:

“We think consumption stays really solid, residential construction stays in good shape, and consumers’ employment and wage levels remain strong,” says Rieder, who expects 1.8% U.S. GDP growth in 2020. “So we think that keeps the economy in good shape.”

"Federal Reserve Chairman Jerome Powell signaled an on-hold stance for the Fed going forward, unless economic data meaningfully change the outlook. Investors probably can’t count on further rounds of interest-rate cuts to boost stock multiples further in 2020, but central banks remain supportive in other way"

"Financials, health care, and industrials are all popular sector picks among our panelists for 2020."

Nothing about a global pandemic. About oil prices going negative or interest rates being cut to zero. Nothing about depression level unemployment and economic contraction. No strategies around how to play the postponement of the 2020 Tokyo Olympics. Unheard of monetary and fiscal policy. To state the obvious, we're not good at predicting the future.

That begs the question, what if you did have this information in advance? What if I had a crystal ball, and told you everything (outside of stock market performance) that would transpire in the world over the next six months - would that information be advantageous? You would know things like the election outcome, vaccine timelines, major geo-political events, unemployment rates, interest rates etc. On the surface, you would want it.

But you don't have (and never will) what is more important. And that is the collective psychology of investors all around the world, when presented with circumstances that are changing every single minute of every single day. And without the ability to distill what that collective psychology would be, you're largely wasting time worrying about what tomorrow will bring.

Had you been provided the crystal ball and seen 2020 ahead of time, the bunker portfolio, heavy on cash, would have likely been the preference. Instead, the Nasdaq 100 is approaching + 40% on the year.

                                   ^{Source: Koyfin}

Consumers tend to reduce discretionary spending in difficult economic times. Yet, many consumer discretionary stocks are taking advantage of retail sales being at all-time highs:

                                  ^{Source: Calculated Risk}

Residential housing has been on fire. From the HAR:

"The single-family home median price rose 8.3 percent to $265,000 while the average price increased 10.1 percent to $329,801. Both figures are record highs for a September. Year-to-date sales are currently 5.4 percent ahead of 2019’s record pace. 

Sales of all property types totaled 11,137 – up 31.9 percent from September 2019. Total dollar volume for the month surged 43.6 percent to $3.4 billion. The lease market cooled in September, with declines in single-family housing while townhouse/condo leases were unchanged year-over-year."

All incredible in light of what we were facing in the spring.

Lastly, and to complicate things further, what if good news and a good market in the shorter-term is actually bad news for longer-term returns? What if we're in some kind of 'upside-down' market? (Note: this is an incredible piece if you want to take a deep dive.)

"An upside-down market is a market in which good news functions as bad news and bad news functions as good news. The force that turns markets upside-down is policy. News, good or bad, triggers a countervailing policy response with effects that outweigh the original implications of the news itself." 

An enforced economic catastrophe, driven by the pandemic, has led to abundant fiscal stimulus and monetary easing, which can largely be defined as successful policy up to this point. If economic conditions were to improve to the point where there's no longer a 'need' for more stimulus, does that in itself turn out to be a bad thing for the market? Maybe.

If your head is now spinning, that was kind of my point. The bottom line: markets are complicated and driven by an insane, complex layer of factors. We're all living through it right now. Onto the election.

The 2020 election

I've been alarmed at the number of inquiries around the upcoming election from family, friends, clients, and retirement plan participants. And I believe the way that it's being covered on financial news networks is largely a disservice to most investors.

We know that there is a presidential election every four years. It is a 'known risk.' Historically, it is the 'unknown risk' that has been problematic for markets. Things seemed fine on September 10, 2001. Then they weren't. The investing climate was great last December. And then COVID-19 came. Pearl Harbor. Black Monday. Natural disasters. There are countless examples from history. True risk is what you don't see, what's not being talked about. In my opinion, just the fact that it's being talked about ad nauseum takes some of the risk off the table. I think I can speak for us all when I say the election has gotten enough air time. 

Let's start with President Trump. The market has held up just fine since 2016, despite warnings then that his election would trigger massive selloffs and poor performance. As the incumbent, there's less attention paid to what his re-election would do for the market because we know what we're getting - a continuation (to a large degree) of the last four years. If you don't like the president and have chosen to let your investments reflect that, its been a mistake. Mixing politics with your portfolio usually is.

From the Wall Street Journal:

"With market volatility rising ahead of November’s U.S. presidential and Congressional elections, investors are parsing what polls and policy proposals mean for everything from energy stocks to shares of private-prison operators.

This anxiety is already showing up in the moves of assets that investors use to protect portfolios and wager on volatility like futures contracts tied to the Cboe Volatility Index, a gauge of expected stock swings. It is also driving moves in sectors that investors believe would benefit from control of the White House and Congress by one party or the other.

Wall Street typically uses these sectors or other assets that would be impacted by different policies to build broad election baskets associated with each political party. Analysts then gauge the performance of those baskets over time to create probability forecasts of who they expect to win in November."

Here are the facts - technology and consumer discretionary have been the best performing asset classes - under both President Obama and President Trump. Financials and energy been the worst two performing asset classes - under each of the last two administrations. Maybe, just maybe, the president isn't as influential on the market as we perceive them to be. Maybe the marketing and rhetoric of each party is more extreme than any actual policy implementation. Does the Democrat Green New Deal actually have an 80% overlap with the Republican Infrastructure Bill? I'm not sure, but it's probably more than you think. Trends continue irrespective of the presidency. I absolutely love this chart.

                                                        ^{Source: SunTrust Private Wealth}

Concerns Debunked

There's been much talk of 'socialism.' under a Biden administration. This rhetoric has been going back years, notably during the 1930's when FDR and Congress passed the New Deal. 1936 Republican presidential nominee Alf Landon called Social Security program the biggest tax bill in history, and a 'fraud on the working man.' Oveta Culp Hobby, President Eisenhower's Secretary of Health Education and Welfare, called a Democratic plan of free polio vaccination for children a "possible back-door approach to socialized medicine." The interstate highway system and Medicare weren't excluded from socialism talk, either.

I like watching what people actually do, not what they say. During the pandemic, there's been money mailed directly to citizens and expanded unemployment benefits. PPP loans under $50k will largely be forgiven. We are running the largest federal government deficits in the history of the country. Airlines, hospitals, colleges and many others have been given bailouts. Cities and states will likely need them in the coming years. Farmers all across the country, having been hit first with the trade war and now the virus, have been in direct receipt of over $37b YTD.  And the only remaining question on more stimulus seems to be whether it's agreed to before or after the election.

^Source:WSJ

So if you're concerned about 'socialism', fear not. Ten years from now we may look back and say that UBI essentially began under a Republican-led Trump administration. I think it's very fair to say that both parties are largely aligned on fiscal and monetary policy right now.

Lastly, there's been some concern that higher tax rates under a Biden administration would lead to lower earnings per share for corporations and less disposable income for consumers. And while this is true, it does not necessarily translate to poor market performance. In fact, some of the best performing decades have come under some of the highest historical tax rates. This is another example of debunking a clean link between one topic and another.

                                                     ^{Source: SunTrust Private Wealth}

Closing

This is not a political post. From an investing standpoint, I am not defending any candidate or policy. But how this election in particular has been covered has been concerning, to say the least. To be clear, considering portfolio changes around what will or will not happen on November 3 signals a capital allocation process that is very, very broken. 

Stay open-minded, and stay consistent with your plan. If you don't have a plan, get one. And to be very clear, a plan is not hanging out in cash, waiting until the election's over. The world probably won't look all that different on November 4. It's an illusion of safety to believe otherwise.

Just go back to four years ago. Watch this 1:48 from the day following the 2016 election. Hillary rally, Trump selloff, Trump rally. The surprise of Trump winning on election night wasn't great news for the markets until 16 hours later when we talked ourselves into tax cuts and deregulation. The market is as fickle as it gets.

I'll leave you with this 2014 conversation with Billy Beane, the famous Oakland A's executive. Beane famously doesn't watch his teams play.

MIB: "Is it superstition that you don't watch? Or is it that you just don't like how tense it makes you?"

Beane: "Actually there's a little bit of method to the madness. We're very much an objective organization in terms of how we make decisions. Simply put, we try to make decisions like an actuary. And as we all know, sports is pretty emotional. I am emotional. I came up just like everybody. When I watch a game, I get a visceral reaction to something that happens — which is probably not a good idea when you're the boss, when you can actually pick up the phone and do something. That probably isn't logical and rational based on some temporary experience you just felt in a game. So a lot of times it's to remove myself from what is happening and ultimately make better decisions when the game is over and you've got the results in front of you. We all react, I do too. Who hasn't screamed at a television set when something they don't like went on? I really don't want to make a decision based on that reaction."

Invest with this lens irrespective of your preferred party winning the White House not. Be Billy Beane. 

--

^Sources:

• ^{The Biden Tax Plan: Proposed Changes And Year End Planning Opportunities (kitces.com)}
• ^{2020 Stock Market Predictions (thestreet.com)}
• ^{2020 Market Outlook (Barron's)}
• ^{Retail Sales Increased 1.9% in October (Calculated Risk)} 
• ^{Houston Home Sales Stage a September Surge (HAR.com)}
• ^{Upside-Down Markets: Profits, Inflation and Equity Valuation in Fiscal Policy Regimes (OSAM Research)}
• ^{Election and Markets: Why Conventional Wisdom is Often Wrong (SunTrust Private Wealth)}
• ^{Kevin Kruse Twitter Thread}
• ^{SBA & Treasury Announce Simpler PPP Forgiveness for Loans $50,000 or Less (sba.gov)}
• ^{How Investors are Trading November's Election (WSJ)}
• ^{'Moneyball' GM Billy Beane Explains Why He Doesn't Watch His Team Play (Business Insider)}
• ^{U.S. Department of Agriculture (Economic Research Service)}

^{The content in this article was prepared by the article’s author. Voya Financial Advisors, Inc. does not endorse its content, and the views expressed may not necessarily reflect those held by Voya Financial Advisors, Inc.}