So far October has turned out to be less than exciting in the markets. While it started off with a rebound from the mild pull-back we saw in September (as was seasonally expected), over the past week it has really slowed down and now we’re looking at a possible negative market return in October. But that’s not what is on everyone’s mind right now.
The impact of the election and implications going forward is much more at the forefront of our collective minds.
But before we dive into that, I want to let our investors know that as of last week we’ve been pulling money out of the stock market. We’ve had several client requests and conversations about wanting to get out ahead of the elections and our data is suggesting and agreeing we do just that. In many cases our model stock market exposure is likely half (or even less) than what a target allocation would be for your risk level. We may take further steps this week to be even more defensive going into next Tuesday if our data indicates so.
Ok, so the election. First and foremost, I have no idea who is going to win and there are a lot of scenarios that can play out depending on various aspects of American politics. The polls and odds-makers have their favorites, but after the last election cycle, those are difficult stats to put your faith and trust in. Those “stats” can be unreliable. What we do know is no matter which way it goes, there will continue to be opportunities in various pockets of the market, and we will continue to watch for them.
This past week I got to visit with, moderate, ask questions, and learn from a lot of really smart people at the NAAIM Outlook virtual conference. Some of these faces you might know from financial news media, and some you may never have heard of, but the opportunity to hear their perspectives on important issues of the day was enlightening, so I want to share some of that wisdom.
“Be prepared for all scenarios – the good and the bad.” – Meb Faber from Cambria
“The next president will inherit a great economy.” – Klaus ti Wildt from Fidelity. He went on to suggest that a Trump win would be good for Taxes and Regulation, while a Biden win would benefit Stimulus and Trade Policy.
Nicholas Bohnsack from Strategas Research laid out what markets could benefit in a broader sense:
GOP: Growth, Domestic, Large Cap, and Technology
DEM: Value, International, Small Cap, and Cyclicals.
These are all just opinions of course, but to me, the takeaway is that no matter what happens, there will be new opportunities to pursue. There will be good points and bad points. But the world will continue to spin and we will continue to use our data to follow the money.
In this month’s chart, I’m back to looking at the VIX Volatility Index. I am now wondering if “40” (green line) is the new normal. Only one year ago, I would have thought a value of “20” or more was a big spike in the index, but that value has now become the floor, while “40” has become a more common peak. When this value is high, it suggests that a lot of money is buying puts (or bets against the market). Going into the election, that does make sense. But what could also happen is that once an outcome is determined and the election is resolved, this value could drop rapidly and the market could potentially start another leg upwards. Until the future feels more certain, though, we’re expecting to see more volatility in the stock market and the VIX Index seems to support that.
Bonds – the bond market, much like the stock market, hasn’t really gone anywhere in the past 3 months. The Aggregate Bond Index AGG is still up just over 6.4% year to date and is now beating the S&P500 in total return for the year by just over 2% (FastTrack Data). Again, another reason to stay more conservatively allocated in the current environment.
Stay positive and healthy,
