Below are excerpts from IWM's 3rd Quarter Review Letter sent to clients last week. If you'd like a copy of the full Q3 letter, send an e-mail to mfox@ithacawealth.com
Behold, the most bullish chart related to the economic recovery in the US, if not the world.
America has a special kind of resilience ingrained in its DNA, that when it suffers a setback, it punches back twice as hard. As the COVID-19 pandemic led to a surge in bankruptcy filings, it also led to a historic surge in new business applications.
Many of these new businesses will fail, and many will succeed. And a select few will be so wildly successful that they ultimately become publicly traded companies worth billions of dollars over the next 10 years.
In the end, the success tends to outweigh the failure, and that net gain is what will continue to drive the global economy further into the future.
The Presidential Election and the Stock Market
Some words on this week’s election and the stock market.
Making investment decisions based on who occupies The White House is one of the biggest mistakes an investor can make.
Whether you lean left or right politically, stocks tend to rise regardless of which party controls the Presidency.
There is a lot of commentary on the potential for a Biden Presidency and a Blue Wave, and what that might look like for the stock market.
If you lean left, the commentary is mostly good. Stocks will rise on a sizable fiscal stimulus deal with another round of direct checks to Americans. On top of that, a multi-trillion-dollar infrastructure bill focused on renewable energy will help stimulate the economy and lead to a strong jobs market for years to come.
If you lean right, the commentary is mostly bad. Stocks will fall on increased corporate taxes and a rise in taxes for American’s who make more than $400,000 annually. And for American’s who make less than $400,000, costs for goods and services will rise because corporations will pass on the increase in their tax bill to their customers.
On the flip side, if Trump wins reelection, many who lean right expect a rising stock market due to continued business friendly policies and low taxes, whereas left leaning investors see a weak stock market caused by increased tensions with China and a failure to contain the COVID-19 pandemic.
It’s all a wash and it should all be ignored. The President has less control over the stock market and the economy as they’d lead you on to believe. At the end of the day, Americans drive the economy, not The White House. And Americans will continue to persist and grow and prosper as they embark on new opportunities and take risk.
Investors who sold because of an Obama presidency in 2009 missed out on significant gains just like the investor who sold because of a Trump presidency in 2016.
Case in point, the WSJ headline above about Obama's "radical policies" killing the stock market was published just 3 days before the bottom in stocks in 2009, a once in a generation buying opportunity that some might have missed out on if they read that article.
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The Risks
When investing for the long-term, it’s important to be aware of the risks that may impact your investment portfolio. That way, when they do occur, you will be better mentally prepared to do absolutely nothing and make no changes to your portfolio (sell) at the worst possible time.
In our Second Quarter Review letter, we highlighted downside risks stocks were facing: the potential for a renewed rise in COVID-19 cases and resulting stay-at-home orders, a lack of additional fiscal stimulus measures from Congress, a volatile presidential election, and stretched valuations.
A lot of those risks contributed to a September & October sell-off in stocks.
- Congress was unable to pass another round of fiscal stimulus prior to the election.
- COVID-19 is on the rise and European countries are transitioning to a “lockdown-lite” strategy. A “lockdown-lite” strategy could very well spread to parts of the US.
- Earnings from large-cap tech companies were not strong enough for investors to rationalize their current elevated valuations.
- Talk of a contested Presidential Election or delayed result has been on the rise.
But there are also upside “risks” you should be aware of that could quickly flip the narrative on the stock market.
- The successful development and administration of a COVID-19 vaccine.
- A swift resolution to Tuesday’s election, which will remove a great deal of uncertainty from the market.
- Another round of fiscal stimulus that is bigger than the previous deals.
- Additional easy monetary policies from the Fed to ensure the credit markets remain calm.
The upside risks listed above are short term catalysts. It’s impossible to guess when they will occur.
Longer term catalysts that could drive the market higher include a continued recovery in the economy, strength in corporate earnings, a resumption of corporate stock buybacks, a sizable infrastructure bill from the next administration, and a cumulative cash pile of nearly $5 trillion held among investors that is waiting to be put back to work in the stock market.
Without risk, there’d be no reward in investing. And the only way to be rewarded is to stay invested for the long term, even when the downside risks are front and center.
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Thanks for reading, and please reach out with any feedback or questions.
