Post‑election Periods Have Historically Been Favorable for U.S. Equities
Investors have historically had heightened concerns about economic factors in the weeks and months leading up to U.S. presidential elections. The idea of policy and leadership changes make those trying to determine the growth prospects of companies and industries uncertain and uneasy. Nothing can dampen market sentiment more than dreaded uncertainty.
Historically, this added degree of anxiety has led to higher levels of volatility in advance of elections, and commensurately lower thereafter. Of course, financial markets trade on numerous factors and each market environment is unique, taking into account much more than just the political landscape.
From a behavioral perspective, worry about an outcome generally creates more volatility that the occurrence of one. Stocks have tended to appreciate in the months following an election far more than they have declined. While results have varied during different election cycles and there are, of course, exceptions, stocks have generally risen regardless of the political party of the newly elected president or whether power is jointly controlled or split by party in the House and Senate. Just having the election in the rearview mirror has typically been sufficient to calm investors’ nerves.
|Market Index Returns||Oct 2020||YTD 2020|
|S&P 500 Index||-2.7%||2.8%|
|Russell 2000 Index||2.1%||-6.8%|
|MSCI EAFE Index||-4.0%||-10.8%|
|Barclays US Agg. Bond Index||-0.5%||6.3%|
|FTSE 3 Mo. T‑Bill Index||0.0%||0.6%|
Stock Market Review & Outlook
A Return to Lockdowns in Europe Added Fuel to Already Tense U.S. Markets
Rising COVID‑19 cases caused concerns of a return to more stringent social restrictions and business lockdowns. New limitations put in place in France, Germany and the U.K. sent concerns rippling across the globe and certainly into the minds of U.S. investors.
Equity markets were weighed down by risk‑off sentiment leading to particularly sharp sell offs during the final trading week of October. The -2.7% return for the S&P 500 masks the overall volatility for the month as the benchmark pulled back by over 7% from mid‑month levels to erase gains posted earlier in the period.
Utilities stocks were particularly strong as investors focused on more green‑energy companies that provide electricity, water and gas and away from the oil industry. Previously high‑flying technology companies pulled back in the month, making Information Technology the weakest sector, followed closely by the energy component of the index continuing to show signs of distress. International equity markets continued to lag behind the U.S.
Usual safe havens during market sell offs provided no protection to investors as U.S. Treasury prices fell with stubbornly low yields bumping up. The bellwether 10‑Year U.S. Treasury yield was higher by 20 basis points to 0.88% at month end.
|S&P 500 Sector Returns||Oct 2020||YTD 2020|
Economic Review & Outlook
One Giant Leap to ... Almost Back to Where We Started
U.S. economic growth in the third quarter posted a record high 33% advance on an annualized basis. The recovery made up some of the lost ground of dreadful Gross Domestic Product (GDP) results earlier in the year.
Strong consumer spending, supported by temporary stimulus payments, provided support to recovering businesses. The latest Retail Sales figures were the strongest in three months, led by purchases of vehicles and home improvement‑related items. Improved Durable Goods Orders in the latest month were driven by solid business orders of capital goods, and regional manufacturing surveys have been supportive of the improving national data. Unemployment in the U.S. continues to decline, but at a slow pace.
Chart of the Month
Investors’ Nerves Tend to Settle Down After an Election
Average VIX Performance in Election Years*
*Since 1990, Source: New York Life (Sep, 2020)
VIX Performance (indexed to 100 - 90 days before the election)
Historically, market volatility has risen in the months leading up to a U.S. presidential election as shown in the chart above. This has been the case in 2020 as well as measured by the CBOE Volatility Index (VIX), a measure of S&P 500 volatility often referred to as the “fear gauge.”
After the VIX reached the highest ever recorded level early this year (based on the shock of the expected impact of the global pandemic) the index settled down to more normal levels, with periodic fits and starts over the past few months. A commensurate decline in market volatility has, on average, historically occurred in the months following an election. How that plays out this year will be seen shortly.
Election day is now behind us. The American people were asked to be patient while the details of a much closer race than the polls predicted were sorted out and a winner declared. Joe Biden was named the 46th President of the United States following four tense days of counting after the polls closed. Although challenges and potential legal battles are expected to come into play, when the dust settles, focus will eventually shift back to our collective economic situation.
The essential steps necessary to return positive momentum back to the economy following the tremendous blow dealt by an unexpected health crisis that shuttered most of our nation will be front and center once again. Reopening our economy to get millions of Americans back to work in a safe manner is a critical order of business. Continued progress in manufacturing and the critical consumption component of economic growth depend on it. These are some of the important landmarks we will be mindful of as we look for opportunities to deploy capital with the most appropriate balance of risk and reward.
Please reach out to one of your Account Officers or any member of our Executive Leadership Team to discuss topics raised in this letter or anything else we can be helpful with.