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In the Market & Economic Outlook, we separate the relevant from the noise, to bring you timely content that helps you on the path to and through retirement!
STATE OF THE MARKETS (S&P 500 +4.3% YTD through 8/13/20)
Stocks finished higher for the fourth straight month with the S&P 500 Index rising 5.5% in July. The stock market now sits less than 1% below its all-time high set back in February.
Despite the economy suffering its worst quarterly GDP decline ever, down -9.5%, stocks are knocking on the door of new all-time highs. Many investors are concerned about the run-up in stock prices, but when you consider that a company’s stock price is based on the discounted value of its future earnings potential, and with interest rates at or near zero, that discounting mechanism has an explosively positive impact on the value of those future earnings. Thus, we believe the stock market is not over-priced and there is still value and opportunities in the stock market.
How Will the Election Affect Stocks?
Almost every day we hear from a client who is concerned about the election and how it might affect their portfolio. Historically, the stock market reaction has been very muted during and after a presidential election year. If you go back almost 100 years to the 1930s, you don’t see much impact on the stock market during an election year. In fact, the stock market was usually higher during an election year.
If the incumbent is re-elected, the stock market for the following year was higher by about 6.5% and if a new President is in the White House, returns were only slightly lower at 5%.
If Biden wins in November, we would expect that the stock market will be more volatile in the first few months of Biden’s administration, as it digests the policies and changes that are forthcoming. No matter who is in the White House in 2021 and beyond, we do not expect major disruptions to the stock and bond markets as a result.
Many investors are so fearful about what lies ahead politically, that they make big changes to their investments during an election year. Allowing fear to dictate your decisions is almost always a mistake, especially when it comes to investing.
The worst thing you can do is abandon your long-term plans during or after a presidential election year. We talk to clients every day on both sides of the political spectrum who think that the world is going to hell in a hand-basket. But who’s right? Probably neither.
Economic Update
Aggressive money printing by the Fed, record low interest rates, a weak dollar, and increased fear has dominated the headlines. In addition, the 10-year Treasury hit a record low of 0.533% on July 31st, while the dollar continues to slide against many currencies.
With all this money being printed, you would think we’d have inflation and sky-high interest rates – but rates are at record lows and likely to stay low for the next 3-4 years, according to the Fed. Inflation is not an issue (at least for now), since the economy is struggling, unemployment is high, and wages are lower.
The economic climate in 2020 has been dominated by extreme uncertainty and change due to the Coronavirus pandemic. We don’t expect this to change any time soon. However, there are a few bright spots and opportunities to pay attention to in this current economic environment.
First of all, with interest rates so low, now is an excellent time to consider refinancing your mortgage – especially if you’re paying 4% or more on a 30-year mortgage, you should seriously consider refinancing because mortgage rates are at record lows – hitting 2.98% (30-year mortgage) in mid-July. That’s the lowest it’s been in the 50 years since Freddie Mac started keeping records!
In addition, with the estate and gift tax climate about as attractive as it has ever been right now, it’s an ideal time to get your estate plan in order and do some gifting. Gifting, especially during your lifetime, can be a powerful strategy to transfer wealth, business interests, property, and a variety of other assets to your family and heirs. Democrat lawmakers are not big fans of the current gift and estate taxes, so if Trump loses in November, the clock may be ticking on the opportunity to take advantage of the current gift tax rules.
Investment Themes
Where to find income?
For investors seeking income, this is a very difficult period that could last several years. According to the Fed. Money markets currently pay anywhere from .01% – .05% and even some CD’s are negative yielding. So, what is an investor to do?
Value and dividend-paying stocks are an excellent place to find income in this current environment. Many value stocks and high-quality dividend-paying companies are currently paying dividends in the 3%+ range. Many of these companies increase their dividends every year providing investors with a growing stream of income.
Disruptive Technologies
We are living in one of the greatest technological revolutions of all time. The coronavirus has accelerated the move to a digital economy.
There are several disruptive technologies that are being adopted that have huge potential markets. These include DNA sequencing, robotics, artificial intelligence, as well as the move towards electrification.
Many new and disruptive technologies have the potential to be trillion-dollar businesses in the next decade. And many investors are so fearful they don’t realize they are missing out on one of the best investment opportunities of our lifetime!
Bottom Line
Stocks continue to grind higher despite increased Covid-19 cases, a terrible economic climate, and the uncertainty of an election year. With interest rates at record lows, stocks continue to offer good value both in appreciation potential and income growth.
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Disclosure:
The views outlined in this newsletter are those of True North Retirement Advisors (TNRA) and should not be construed as individualized or personalized investment advice. Any economic and/or performance information cited is historical and not indicative of future results. Economic forecasts set forth may not develop as predicted.
Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product made reference to directly or indirectly, will be profitable, equal any corresponding indicated historical performance level(s), or be suitable for a given client or portfolio.
Investing in stocks includes numerous specific risks including the fluctuation of dividend, loss of entire principal and potential illiquidity of the investment in a declining market. Bonds are subject to market and interest rate risk if sold prior to maturity. Bond and bond mutual fund values and yields will decline as interest rates rise and bonds are subject to availability and change in price.
Any questions regarding the applicability of any specific issue discussed above should be addressed with TNRA. All information, including that used to compile charts and/or tables, is obtained from sources believed to be reliable, but TNRA has not verified its accuracy and does not guarantee its reliability.
Moreover, you should not assume that any discussion or information contained in the newsletter serves as the receipt of, or as a substitute for, personalized investment advice from TNRA or from any other investment professional. To the extent that you have any questions regarding the applicability of any specific issue discussed above to your individual situation, you are encouraged to consult with TNRA or the professional advisor of your choosing. All information, including that used to compile charts, is obtained from sources believed to be reliable, but TNRA has not verified its accuracy and does not guarantee its reliability.
