As we move toward the end of the first quarter of 2020, it can be difficult to ignore the dramatic headlines that seem to change on a daily basis. Election, impeachment (now in the rearview mirror), tariffs, coronavirus. They all compete for our attention. But, does any of this really make any difference when it comes to managing your portfolio and planning for your financial future? Let’s look at some facts.
Much of the country was gripped with news of the impeachment from the end of 2019 through the first part of 2020. Regardless of your political leanings, this story seemed to occupy the consciousness of much of the American public. But the financial markets seemed to shrug all of this off. Why was that? First, the markets had quite a bit of time to digest the impeachment news. After the 2018 elections, the House and Senate both appeared to be quite partisan and that expectation was priced into market expectations for the impeachment proceedings, meaning that impeachment was expected in the House and acquittal was anticipated in the Senate. Investors continued to look at fundamentals when investing (economic growth, corporate profits, labor markets, etc.) and none of these were affected by the impeachment process so did not impact the stock market. In other words, this was a political event that the market shrugged off.
But, what about another looming political event in 2020, the election in November? Since this is an election with an incumbent in office, we need to look at history when that has been the case. And when making investment decisions, we need to set aside politics and let history be our guide. Since 1952, the Dow Jones Industrial Average has returned 10.1% on average during election years when a sitting president has run for reelection. A corollary to that is when the election has an open field (no incumbent), on average the Dow has fallen 1.6% over this same time period.1 One reason for this is that sitting presidents running for a second term, tend to roll out new policies that will bolster the economy running up to their reelection bid. Watch for that during 2020.
International trade and the threat of tariffs were frequent headlines during 2019. Tariffs can have a dampening effect on the economy as foreign countries retaliate against tariffs imposed by the U.S. However, it is important to keep in mind that exports for the U.S. as a percent of GDP are just 8%. In other words, the U.S. economy is not terribly reliant on exporting goods for economic growth. However, that same percentage is 19% for China, 26% for Canada and 37% for Mexico.2 This means that although tariffs impact the U.S. economy, they will have a greater impact on other economies that are more dependent on exports. The market reacted favorably to the U.S. China so called “Phase 1” deal signed in January with expectations for a Phase 2 deal later in the year.
Since January, the coronavirus has leapt into the headlines and captured our attention (and perhaps played on our fears). During the last week of February, the S&P fell over 11% and the Dow fell over 12% largely on fears of spread of the virus, impact on the global economy and supply chains and personal health safety. Although a troubling health story and perhaps a cautionary tale for those of us who love to travel, this needs to be viewed as an “event” rather than an overriding long-term concern for the financial markets. Historically, Wall Street’s reaction to similar epidemics (SARS, Ebola, Zika, etc.) has been short-lived. Twelve months after the first occurrence of SARS in 2002, the S&P was up 20.7%. The same can be said for the Ebola epidemic which appeared in 2014 (S&P 12-month return of 10.4%) and Zika which was identified in 2016 (S&P 12-mo return of 17.4%).3 Of course, the severity of the virus ultimately will dictate the market’s reaction and although markets have tended to shrug off past outbreaks that does not mean the same will be true this time. However, history does show us that “events” like this should not be viewed in isolation but looked at in conjunction with other prevailing market and economic conditions most of which are positive at this point.
So, if we need to look past the headlines for guidance about the financial markets, where should we look? As always, equity markets generally trade based on economic fundamentals which remain very positive at this point. Unemployment is at record low levels, wages are rising, consumer confidence remains high and corporate profits have continued their positive growth trajectory (although slowing). As you know, at Atlanta Financial we do not time the markets. We believe in investing in fully diversified portfolios that are designed to weather a variety of market conditions and “events.” And we work with each of our clients to determine the level of volatility you will be comfortable with as we work toward your financial goals. In other words, we help you see past the headlines and remain focused on your financial future.
We are always happy to discuss your portfolio or concerns about the headlines you are seeing or other items in your financial life as they occur. Give anyone on our team a call to discuss what is on your mind. We’re always happy to hear from you!
The foregoing content reflects the opinions of Atlanta Financial Associates and is subject to change at any time without notice. Content provided herein is for informational purposes only and should not be used or construed as investment advice or a recommendation regarding the purchase or sale of any security. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct.
Past performance may not be indicative of future results. Indices are not available for direct investment. Any investor who attempts to mimic the performance of an index would incur fees and expenses which would reduce returns.
Securities investing involves risk, including the potential for loss of principal. There is no assurance that historical trends will continue or that any investment plan or strategy will be successful.
1 Stock Trader’s Almanac
2 JP Morgan Q1 2020 Guide to the Markets
3 Dow Jones Market Data