David@valuealigned.com
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Berk's Blog

It’s the End of The World….Again

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“If you mix politics with your investment decisions, you’re making a big mistake.” -Warren Buffett

The last week in October was a terrible week for the market. The S&P 500 index was down -5.6%, the worst week since March. The ValueAligned Model Portfolio (“VAP”) is up +3.8% year-to-date after expenses. The S&P 500 index is up +2.9% year to date.
The world is coming to an end again. Coronavirus is back as positive tests spike particularly in Europe. Threats of lockdown restrictions, particularly in Europe are also back causing nightmares for small business owners, their employees and parents of school age children.

You don’t need me to tell you there’s trouble out there. The stock market has been doing that for us in recent days. Oh, yeh there’s an important election in the US on Tuesday. Walmart put away their guns and ammo this morning. In most major cities store fronts are busy boarding up windows this weekend to protect against rioters. At least the left has broadcast their intention to shut down major cities from Nov. 4 till inauguration no matter who wins.

In the US, it’s been a V-shaped recovery since the economy bottomed in April through October. (Can you see the “V”?) Just take a look at gasoline usage above. It seems to have stalled, but it is only 7.7% below the year-ago pace.
One more “V” to make the point. Conditions in the Richmond, VA area are fantastic. That’s a “V” shaped recovery if ever I saw one.

The third quarter rebound in real GDP released on Thursday was impressive. Real GDP grew at a +33.1% annual rate, the fastest pace for any quarter since World War II. Consumer spending led the sharp rebound from the self-imposed Great Depression-like cratering of economic activity in the second quarter, growing at a +40.7% annual rate.

The largest annualized gains in consumer spending included recreation services (+276.6%), food service & accommodations (+209.9%), transportation (+173.0%), and health care (+93.7%). Still, real GDP and consumer spending remain noticeably below the peaks hit in late 2019, with real GDP still down -3.5% and consumer spending down -3.3%. In other words, despite the massive gains in Q3, which were better than anyone expected back in April, we still have a long way to go for a full economic recovery.

Despite the “V” shaped recovery the latest wave of the pandemic is bad news for services industries that will have to survive ongoing voluntary and enforced social distancing. On the other hand, due to historically low mortgage rates, the migration to the suburbs, and work at home policies, housing-related industries should continue to boom.

STOCK MARKETThe S&P 500 Index surged an impressive 60% from the March 23 bottom to the most recent high in early September (Bloomberg). But stocks hit a roadblock in September and It’s down about -9% since then.

Given the incredible run, a pullback was inevitable. But as I’ve said before, the timing, magnitude and duration of a pullback is impossible to predict. Your success is based, at least in part, on time in the market, not timing the market.

There were several factors that played a role in this stock market pullback.

● Any uncertainty creates a good excuse to take profits after a big run-up in price.

● Daily Covid “cases” in the U.S. are reaching new highs btu this time we know who to protect and how to treat it better so deaths should continue to slow.

● Congress could not find common ground on new support. With the election looming, the market began to discount no new help from Congress from the beginning of September.

● Finally, the election is front and center. We may not have a winner on election night. Worse, a disputed election would add to investor angst.
2020 election

I am not a political analyst. I am here to guide you as you journey toward your financial goals. I will review the current contest through a very narrow prism-through the eyes of a dispassionate investor focused on the economic fundamentals and how that might impact stocks.
Let’s consider these facts.

1. Stocks have performed well under both parties.

2. The conventional wisdom isn’t always right. Recall that stocks weren’t supposed to do well with a Trump win, as investors wanted the continuity a Hillary Clinton presidency would offer. They soared from the bottom the night of the election.

3. Compromise and gridlock may engulf a dominant party, as a one-sided win tends to expose party divisions. Remember how Republicans would quickly repeal Obamacare?

Some investors fret that a Biden win would lead to higher corporate taxes and heap more regulations on businesses. But might we see more fiscal stimulus and an easing in trade tensions, which could support shares?

Longer term, stocks march to the beat of the economy, Fed policy and corporate profits. In fact, Dr. Ed Yardeni asks, 
Could it be that the White House and the Congress don’t matter as much to the stock market as does the Fed? I think so, and so does Barron’s, which chose to run a cover story this week on Powell titled “The Winner.” The article observed that no matter what happens on Election Day, Chairman of the Federal Reserve Powell is the “Washington leader who has done more than any other to stabilize the U.S. economy and steady markets will go about his business as usual. 
We will hear from the Fed the Thursday after the election. I expect that the Fed will continue to backstop the financial system and keep interest rate at or near zero for a long time.

The stock market has continued marching higher despite the inevitable crises. Somehow a growing economy fueled by innovation and entrepreneurship has been the biggest driver of stocks over the many decades. In my opinion, that’s not about to change. It may be slower with greater regulation from Washington but the US innovator will always have surprises in store for us.

We have addressed various issues with you, but I have an open-door policy. If you have questions or concerns, let’s have a conversation. That’s what I’m here for.As always, I’m here to talk any and all of these issues through with you; that’s my job.