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Astoria Strategic Wealth

Q3 2020 Market Commentary

An extraordinary year continues as we enter the final quarter of 2020.  The news of President Trump contracting the Coronavirus only added to the myriad of global events that have fueled continued uncertainty in the financial markets.  While election years are always important, this one is arguably more significant than many.  Please know that we will continue to be proactive in helping you assess and respond to these dynamic times from a financial planning and investments perspective.  In the interim, we hope that you are enjoying our fall temperatures, traditional seasonal activities that are still available, or new experiences as we continue to navigate our pandemic world.  Not all change is bad!  We continue to be deeply grateful to our first responders, as well as empathetic and appreciative of our teachers, students, and parents alike as the fall academic calendar resumes.

With the (official) election less than 30 days out, and after having weathered the initial blows of the COVID-19 pandemic in addition to a period of heightened social unrest, we enter what will undoubtedly be one of the more divisive political periods in our recent history.  A quick glance of any media source can cause even the most steady personalities to feel angst. 

What does the future hold for America?  What will happen to my investment savings if fill in the blank of the candidate is elected?  Should I pull out of the market until things subside?  Is this time different?

The media’s relentless negative news is built to stoke the embers of people’s fears into flames.  Measured and reasonable does not sell.  Social media channels are ostensibly even worse.  Now, we can get a minute-by-minute update on the latest political, financial and philosophical musings of our favorite professional athlete, entertainer, childhood friend, neighbor, or neighbor’s pet.

A quick scan will make you wonder if the ‘end is nigh’.  So, where do we turn?  Given our firm’s commitment to empirical evidence, we like to turn to history as a good starting point.  As Mark Twain put it, “history doesn’t repeat itself, but it often rhymes.” 

Since the election is imminent, let’s look historically at how markets have responded to presidential elections from an investment return standpoint.  Going back to 1860 (per a recent study by Vanguard), a traditional 60% stock / 40% bond portfolio has had higher returns in presidential election years than non-election years (8.9% in election years vs. 8.1% in non-election years).  Even more, once a candidate is in office, the political party in power has not mattered in terms of investment returns.  The annual return is 8.4% when a Democratic president is in office (65 periods) and 8.2% when a Republican president is in office (94 periods).  A difference in returns of .2% in a 140-year time period.

What about volatility?  The same Vanguard study measured volatility using the S&P 500’s daily return volatility going back to 1964.  Measuring 100 days before and 100 days after a presidential election, the average annualized volatility is 13.8%.  The average annualized volatility of the S&P 500 is 15.7%.  So, surprisingly, volatility has historically been lower in time periods leading up to and after an election.    

Given the pandemic and social unrest, is this election year different?  Surely, we have never experienced anything like this before, right?

Not so fast - 1968 was a very similar period.

The year of 1968 included the assassination of civil rights leader Martin Luther King Jr., the ensuing riots across the country where dozens were killed and thousands injured, the assassination of Mr. Robert Kennedy, and the explosion of Vietnam related protests. 

The setting:  The incumbent, President Lyndon B. Johnson (LBJ), was quickly falling out of favor.  LBJ was already facing internal opposition with several in his party running against him.  In March, LBJ stunned the nation when he announced he would not run for re-election.  Among the front-runners remaining were John F. Kennedy’s brother, Robert Kennedy.  Mr. Robert Kennedy was assassinated in June, right after having secured a crucial primary win in California.  Third-party candidate Governor George Wallace subsequently entered the race. Because of Mr. Wallace’s support, some thought no candidate would receive the necessary electoral college votes.  [In that scenario, the House of Representatives would determine the Presidential winner].

One more thing - 1968 also included a pandemic.  The H3N2 virus emerged and killed over 100,000 in the U.S. and more than 1 million worldwide.

The result?  A highly divisive, potentially indeterminate election coupled with heightened social unrest, and a pandemic.  Sound familiar?

Surprisingly, the market returned 10.8% in 1968, even after starting the year down over 9%.  The U.S. market has subsequently returned over 10% annually since that time period. 

The U.S. has faced loads of uncertainty, even in its recent history, and has proven to be incredibly resilient.  Historically, the most proven path to investment success has been to “stay the course”.  This message is not a new message from Astoria but looking back over our nation’s history and gaining (or regaining) this perspective is a helpful reminder.  We hope it is particularly helpful when juxtaposed with the messages heard from pretty much every source of media today.  We agree with Warren Buffet when he states, “the most important quality for an investor is temperament, not intellect”.

Of course, this time could actually be different.  There is no guarantee that the market (or our country) will go “up and to the right” in perpetuity.  But we can approach the analysis with a level head and the wisdom that comes from historical perspective.

So, what are we doing now?

  1. Election Results - we are pro-actively looking at the potential effects of Vice President Biden’s tax proposal(s) on income tax, estate taxes, and long-term capital gains rates increases for high income earners. 
  2. We will continue to monitor for tax loss harvest/gain opportunities that cross our operational thresholds. 
  3. For those who are investing large amounts of cash and concerned about volatility, we continue to recommend systematically dollar-cost-averaging these investments into the market. 
  4. If both the Senate and Presidential administration flips blue, we will work with your tax professional to consider accelerating income AND deductions, as Biden’s tax proposal(s) would likely both increase tax rates and lower the value of deductions starting in 2021. 
  5. We are happy to assist in modeling any potential planning adjustments needed in the case of a prolonged, severe downturn.   

In closing, we understand today might feel very uncertain.  It is normal to feel trepidation when your life’s work is directly tied to the market.  We hope the above gives you some peace of mind knowing that we have been in similar circumstances before and have resiliently come through it, albeit it was bumpy along the way. 

For your reference, below are the returns of market benchmarks over various time periods, including quarter and year-to-date.  We hope these too will provide steady perspective.