Emotions & Opinions
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Tough to watch the siege of the U.S. Capitol Building Wednesday, as protesters broke through security checkpoints and forced their way inside Congressional Offices.
It was without doubt a dark day for democracy, as the rest of the world looked on. What was compelling, was that the house members were able to come back and cast votes through the night, seemingly operating as normal as possible. As most of you know, I’m anti-political. I believe the market operate in spite or despite who is in office, I’ve even done the math on it. Click here to see performances under the leadership of different parties.
The point I would like to stress is there’s a major difference between people’s emotions and the returns of the capital markets. Historically speaking, earnings ultimately drive stock market prices not opinions or emotions, regardless of how strong they are. I acknowledge that the political factor is an influence in the short term, but it’s only one of many factors.
Since the general election, and also since the Georgia run off, I’ve received a few calls and emails asking whether the markets will collapse under a Democratic sweep, or whether any changes to the tax laws will have a devastating impact. The short answer is no, I believe the biggest influencer in short term market swings is uncertainty. The market hates it and doesn’t know how to price it. A democratic sweep typically does not provide uncertainty. We can now assume stimulus would be increased, which the market seems to love. The Fed, (in its statement last week), reiterated its easy money policy for “some time”, and there will likely be an infrastructure spend, which should be good for the industrials.
None of this is to say that I’m not concerned about the future. And when I say future, I mean our grandchildren’s future. The mountains of debt that we are building needs to be paid for at some point, and that period is usually when we are in times of economic growth. GDP in the past few years has been anemic, but still positive, and in these past few years we have added around $7 Trillion in debt…with more to come. Click here to take a look at the world debt clock. It’s quite scary to watch.
The market however can’t look that far ahead. I’ve argued before that the market can only look around 30 months ahead. Anything further than that is too uncertain. I’ll sum this part up by saying, making investment decisions based solely on elections usually ends up in disappointment.
I’ll go back to a chart that I haven’t put up for a while, mainly due to all the things we had to deal with in 2020. If you have been reading these articles for a while, you’ll know that I’ve been a proponent of us being in a secular bull market.
The period from 2000 to 2013 was the lost decade from market returns. I believe if we were able to look another 100 years ahead the chart would look similar to this. Secular bull markets, average around 14 years, and if we apply that math today, it would tell you this secular bull still has 6 years left in it. Now remember that inside a secular bull run you can get 20% pullbacks and you can have recessions. It’s a normal and fundamental part of capital markets.
So, what should we be focused on today? Simply put, the money supply. When you have supportive Central Banks there is a 94% correlation of a positive stock market.
I would worry about stock market returns more when the spigot of liquidity to slowed down or turned off. If we take the word of the Fed now, then that’s still a way off. Rates have started to move, but still have a ways to go.
So, let’s sum up by saying emotions and opinions are like butts. Everybody has one, and there is a reason they’re in the rear. That said, here’s the buy/sell. Just know I will be changing the 2021 fair market value to coincide with expected increased stimulus providing a potential positive effect on earnings.
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