With client portfolios finally in the black, we’ve been getting calls asking whether this would be a good time to go to cash, in anticipation of the national elections. After the market’s dizzying decline of 34% in the Spring, it is understandable that, having dodged a bullet due to The Fed’s massive intervention in the economy, investors would want to take a breather.
We will take a pass on our standard admonition that you can’t successfully time the market, in favor of asking whether our clients are asking the right question. Markets, by their very nature are not a referendum on the economy, nor are they commenting on what is happening in the present. They look to the future and attempt to discount it for investors.
Whatever the outcome of national elections in a few months, today’s prices reflect the market’s feelings on potential changes to tax law, regulations, etc. The election results would typically be anticlimactic. Instead, we think the markets are looking at two other factors that would have a more direct bearing on future earnings: the likelihood of a vaccine that would be at a minimum 50% effective AND the outlook for continued government stimulus until the economy can reopen with relative certainty.
The FDA has set the bar REALLY LOW for the effectiveness of a vaccine at 50%. One would think that 60%-70% would offer more confidence in combatting the virus, HOWEVER, science is now being politicized in America, so no big surprise there. Then there is the issue, not of a vaccine, vaccines have never cured anything; but vaccinations in a nation where an estimated 30% of the population are anti-vaxers. Assuming that there is a vaccine that meets the FDA’s admittedly low bar for effectiveness, can sufficient supplies be produced, will it require a booster shot, and most importantly, who will be first in line to receive the vaccine and how long does it take to create immunity. It will surely be a mess.
Speaking of messes, despite this being an election year, I cannot for the life of me understand why politicians are being parsimonious with stimulus spending to keep the economy afloat. Reportedly 20 senators believe that the economy should receive no more support from Congress. If the economy does not continue to receive significant support from Congress, I fear that the economy may experience the same outcome as we did coming out of lockdowns too soon; a squandering of all of the good we did, because we were too anxious to return to business as usual.
Admittedly this does not paint a rosy picture for the markets, and yet, we can’t take the chance that despite how things look today, there will eventually be additional stimulus and a viable vaccine may be distributable by year end. At least, that is what the markets are telling us right now.