September 21, 2020 | A time to Reap

Get the Tums. It’s autumn.

Stock markets traditionally wobble in September. Then most of the seasonal lows have come in October. In fact, some of the most gut-wrenching moments in financial history have occurred that month. The good news, we always recover.

We will this time, too. But the ride ahead will be a bumpy one. Look at the convergence of factors.

• In Canada we have epic public debt and a spend-happy federal minority government bent on remaking society, starting Wednesday. Public finances are shot for a generation. Oh boy.
• Covid’s back. More than half the US states have rising cases. The UK may lockdown again. India, Brazil, Spain. All a mess.
• Big milestone now. Two hundred thousand virus-related deaths in the States. Six months ago that would have been utterly, unbelievably, fantastically, radically inconceivable. Sunday night US networks were talking about 400,000 victims before we’re done.
• The American economy is stalling out a bit because Congress can’t get its act together on more stimulus. That logjam will probably be broken, but there’s already $3 trillion in new debt. What a hole.
• Tech’s too big.  Investors have pumped up the FAANG guys (and others) to the point where large-cap technology companies represent 44% of the entire S&P 500 capitalization. Tech valuations got ahead of themselves. As did Tesla. The RobinHood kids have been pouring gas on everything. Big pullback was inevitable.
• No vaccine timetable yet. Normal isn’t coming back for a long time.
• And the presidential election. The fight over replacing RBG. Worries that the outcome will not be known for weeks, maybe months. Court challenges, and the kind of uncertainty that markets hate.

Mix in trade disputes, international money laundering, the collapse of global travel and tourism plus hardened borders and a sudden drop in immigration, and you get this – wild days on the markets, especially as we head into the November 3rd balloting.

By the way, here’s some new polling, with odds for the Presidential winner averaged between PredictIt, FTX.com and Betfair. It looks like a Biden sweep. But wait. What if 5,000 pickup trucks with rebel flags arrive in Washington, circle the White House and form a Trump Freedom Guard?

That’s, ah, actually not a joke.

Should you worry?

First, markets are not rooting for Trump or Biden at the moment. Investors care more about stimulus – whether it comes from the Fed or from Congress. So far there’s been enough of it to ensure stocks soared from the depths of Covid despair (March 23rd) to record highs (August). Odds are this will continue for at least the next two years.

Second, Trump’s a known economic factor and Biden is a centrist. There are no radicals here. A Democratic win may in time see higher corporate taxes and more social spending, but it will not result in a socialist tsunami pushing America into depression. Historically markets have actually done better under Democrats than Republicans (68% advance per term vs 52%).

In short, history shows us markets are freaky before every US presidential contest, and rapidly absorb every outcome. How they respond if Covid lasts for years is another matter. As we pass the grim 200,000-dead-Americans milepost, this is clearly affecting investor sentiment.

Buy or sell?

Well, consider the reasonable outcome. President Biden in 2021. Trade war with China tamped down. The US assumes more of a global leadership role – rejoins the WHO, works towards climate change response, drops protectionist measures, stops playing footsy with dictators. A vaccine is finally sanctioned and inoculations begin. That takes two years (at least). Trade, travel, tourism and immigration start to creep back. Corporate profits rebound. Unemployment drops back to single-digit levels. GDP growth leaps ahead after the disaster called 2020. WFH is no longer a thing. Suburban house prices melt a little. In some places, a lot.

During all of this, interest rates stay depressed by central banks, governments continue to spend beyond their means, bond yields languish in the ditch, and equity markets remain the only game in town delivering sustained growth.

Conclusion: ignore it all. If you have a nicely-built portfolio, hands off till January. If, on the other hand, you’re a hopped-up day-trader with big Tesla options or 3x leveraged ETFs, you could try prayer. I hear that works. Sometimes. Ask Trump.

Garth Turner September 21st, 2020

Posted In: The Greater Fool

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