With everything we have all experienced in 2020, I know I’m tired of writing, seeing, and hearing the phrase “unprecedented times”. I think we’d all like to go back to precedented times.
The good news—and the title promises good news so I’m going to deliver it—is that the big worries of the fourth quarter don’t seem to be big worries at all. Keep reading for good news on the big three.
Election years are always rocky
Plenty of people talk about how election years can cause market instability and uncertainty overall. We’ve probably written as much in the past few months. But going back to 1860, if you take a sample portfolio that’s 60% stock and 40% bonds, you’ll get an average return of 8.9% in election years compared to 8.1% during non-election years. Those numbers are pretty close. Looking at it another way, from 1964 on, the 100 days leading up to an election and the 100 days following an election have seen the exact same level of volatility in the S&P 500, 13.8%.
The market is still unstable
The market recovery has been remarkable from where we were in March & April, and a handful of companies are responsible for the vast majority of gains. Facebook, Amazon, Apple, Microsoft, and Alphabet (parent company of Google) are up an average of 28%, while every other company in the S&P 500 is down about 8%. So, tech stocks as a silo are significantly higher than any other industry. But, with interest rates low (and staying that way… but more on that later), some analysts are discounting their price/earnings ratios (P/E ratios) and seeing additional growth for the market.
Interest rates
One of the first things the Fed did in February—to try and stem the tide of market instability—was slash interest rates. Now, they’ve released their “dot plot” for the future, which is a simple chart plotting where each of their officials believes interest rates will be in each of the next few years. Based on that chart, it doesn’t look like we’ll see an increase for 2021, and only one Fed official is predicting an increase of any kind for 2022. All of them predict an eventual return to interest rates in the neighborhood of 2% or 3%. Of course, none of them placed a hard date on that, so they can keep kicking that can down the road.
See, we can report good news. Hope that makes for a better weekend.
Peter