The election results are unfolding and the markets are shrugging.
Hosted by Creative Planning Director of Financial Education, Jonathan Clements and President, Peter Mallouk this podcast takes a closer look into topics that affect investors. Included are in-depth discussions on financial planning issues, the economy and the markets. Plus, you won’t want to miss each of their monthly tips!
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Transcript:
Jonathan Clements: Hi. This is Jonathan Clements, Director of Financial Education at Creative Planning. With me is Peter Mallouk, President of the firm, and we are Down the Middle. Peter, back in 1984 Ronald Reagan had a famous commercial that said, “It’s morning in America.”
Well, it is 11:00 AM Eastern Time on the day after the election, and it is, indeed, morning in America, except we don’t know the election result. What should investors make of all this?
Peter Mallouk: Well, it’s interesting. Let’s just back up from it a second and get away from the emotion of the moment. We know that the market in any given year the odds it’s positive are about three out of four. It turns out that when there’s a Democrat as president the odds are about three out of four.
When there’s a Republican as the president, it’s three out of four. When the Senate is with one party and the presidency’s with another, it’s three out of four. People listening to this, they’re wondering about the market.
Now what does the market not like? The market doesn’t like uncertainty. It’s okay to have it take a few hours or a few days for an election outcome. The market can handle that no problem. I think people are overreacting to how the market might respond to a multi-day delay. I don’t know that it’ll come to that.
Maybe by the time someone listens to this later today we have an election result. If it did take a few days, that’s okay. The one risk for the market here is if there’s a disputed outcome, legitimately disputed, and we really wind up litigating this. That’s the one thing that would be negative for the markets.
I think it’s looking like one of these two candidates is probably going to emerge with a win that’s fairly clear here. Let’s play out a scenario where, there’s a lot of scenarios, and I’m not one of those guys on cable news pointing at a map, but if we look at what is trending now.
I think the Democrats would be surprised they didn’t get the Senate maybe, and the Republicans may be surprised they don’t take the White House. When you have a split like that, if we do have a President Biden with a Senate that’s still under Republican control, it forces compromise. It forces back and forth. In a worst case scenario, it forces a stalemate.
The market’s okay with all of those things.
Jonathan: Well, this morning that the market is okay with it. People are assuming, at this point, that we will have a divided government, and the stock market is up over 2%.
Peter: That’s right. The market’s pricing that in right now that it’s going to be a divided government. The market’s just looking at the probabilities of both of these outcomes, and it’s saying, “We’re not going to see major change in either direction.” The market’s comfortable with that.
Jonathan: I encourage people to think back to November 2016, when Donald Trump was, to a lot of people’s surprise, elected president. Certainly I heard from plenty of people, it’s like, “This is a disaster. I’ve got to sell stocks.”
Well, don’t forget what happened in 2017. The S&P500 was up almost 22%. You should not invest based on your political happiness or unhappiness. If you do that, the likelihood is, based on the odds that you suggested, Peter, you’re going to end up on the wrong side of a market rally.
Peter: I completely agree. I have phone calls with clients every day of my career, and I remember the day after President Obama won talking to people that were losing their minds, and thought, “Oh, I’ve got to move to a different country.”
There were a couple of people I could not convince to stay invested. It was a huge mistake. The market was way up under President Obama. Then had the same discussions with President Trump. Don’t let your emotions, whatever side of this you’re on, how unhappy you are about the presidency or the Senate, the market barely cares.
The market cares about interest rates, and earnings, and adaptation of technology, innovation, and demographics more than they care about this. I know it’s hard to believe. It’s not to say there’s not an economic impact either way. There definitely is.
It’s one of many, many things that factors into the way the market looks at things. If there’s one takeaway from this very short episode that we’re doing, it’s go ahead and be emotionally and psychologically invested in the political outcome, but don’t let it bleed over into the way you see the long run economy of the United States.
Jonathan: I notice you often say, Peter, “What investors care about are corporate profits and the rate at which we discount those corporate profits based on interest rates.” Think back to why the market was up in 2017. It wasn’t that people were applauding that Donald Trump got elected. They were applauding the corporate tax cut.
The gain in stocks during 2017 was almost exactly equal to the cut in the corporate tax rate. One of the things that will likely come out of a divided government is that we may not have a major tax bill in 2021. The corporate tax rate may remain where it is. For stock market investors, that’s a good thing. They’re not going to see after-tax corporate earnings take a hit.
Peter: Yeah, or it could be a compromise. There could be a tax bill that’s full of compromises. The market will price them in, and it will move on. Just, if you’re listening to this, you’re worried about your portfolio because President Biden’s in office, or because the Democrats don’t control the Senate, just pick your favorite product.
Let’s say it’s Nike shoes, and do you think over the next four years Nike’s earnings have been impacted by this? Do you think Nike is going to sell more or less shoes because of this?
You take it over to your favorite publicly traded restaurant chain, and so on. We’re not going to see dramatic changes to McDonald’s and Disney World and other places based on this over the next four years.
Take the emotion out of it, and hopefully your guy wins, but from a portfolio perspective the market’s shrugging.
Jonathan: One last question for you before we draw to a close, Peter. The big issue for the stock market in 2020 has been the coronavirus and its impact on economic growth. That is what has been driving stock prices up and down.
Given that we’re ending up with a divided government, does it mean anything in terms of the economic impact of the coronavirus?
Peter: I think when you like at the market, the last 10 big drops from March all the way to today, all 10 of them have been related to the COVID-19 outlook, and whether or not we’re going to have to go back into a lockdown.
I think we’re going to continue to see that, no matter how Congress shakes out, no matter how the presidency shakes out.
As we get news about vaccines being accelerated or delayed, as we get news about countries in Western Europe locking down or reopening, as we get news about the mortality rate, or our treatments of whether they’re improving or not, that’s what’s going to drive the market more than anything else over the next few months.
Jonathan: In other words, what’s going to count going forward is news. What you’re hearing on the cable news channels today, what you’re reading in the newspaper, that is already reflected in stock prices. Don’t be reacting to what you hear today. Instead, what’s going to drive stock prices is how we cope with the coronavirus in the months ahead, and what it means for economic growth.
Peter: That’s right.
Jonathan: At the end of this truncated podcast, Peter, it’s our usual, the tip of the month. What’s your tip of the month?
Peter: Don’t pay attention to polls. I think all of us learned that. I don’t know, how many times do we have to learn it? Don’t pay attention to polls.
Jonathan: It does seem like pollsters have a similar track record to market timers, and maybe weathermen. They just can’t get it right.
Peter: Lots of variables. How about you, Jonathan?
Jonathan: I’m going to actually do a repeat, but not a repeat of one of my tips of the month but one of yours, because I found it so startling. I think this was last year you mentioned that if you have a child who’s turning age 18, you should get them to sign a healthcare power of attorney.
So that if they’re involved in an accident and they are incapacitated, you can make medical decisions on their behalf, and you can find out their medical condition. If you don’t have that power of attorney, in a lot of states because of privacy concerns you won’t be able to learn what sort of physical shape your kid is in if they’ve been involved in an accident.
You certainly won’t be able to get involved and make medical decisions on their behalf. I’m not sure whether talking about your kid being involved in an accident is a good thing on the day after an election.
I thought it was such a great tip that you had, Peter, I decided I’d go for the repeat.
Peter: I appreciate that. Good to see you Jonathan.
Jonathan: All right. This is Jonathan Clements, Director of Financial Education at Creative Planning. You’ve been listening to me and Peter Mallouk. We are Down the Middle.
Disclosure: This commentary is provided for general information purposes only and should not be construed as investment, tax, or legal advice. Past performance of any market results is not assurance of future performance.
The information contained herein has been obtained from sources deemed reliable, but is not guaranteed.
