Quarterly Commentary: Third Quarter 2020

As we enter the 4th quarter of 2020, we are encouraged by progress in the economy and the markets, despite the convergent headwinds of the global pandemic, a recession, civil unrest, and climate issues of forest fires and hurricanes.  Adding to this complicated mix of economic and social challenges is the November 3rd presidential election.

While stocks pulled back modestly in September, most of the major indices in the U.S. and abroad posted positive returns for the quarter, further recovering from the pandemic-induced decline. Even the news of the president’s Covid-19 diagnosis and hospitalization couldn’t dampen sentiment, as the S&P 500 fell less than 1% on the day the news was reported.

While the economy remains in a recession – with millions of people still out of work from pandemic-related layoffs –we are witnessing signs of a recovery as businesses across America begin to reopen. GDP growth rebounded dramatically from the dismal annualized 2nd quarter rate of -31.4%, rising an estimated 35% for the third quarter. Meanwhile, the unemployment rate has fallen from roughly 15% to 7.9%, declining for five consecutive months. Housing has been particularly resilient throughout the year, while a number of other sectors from manufacturing to retail have reported data that indicates signs of progress.

Fed policy change

In a congressional hearing last year, freshman Democrat, Alexandria Ocasio-Cortez, grilled Fed Chairman Jay Powell, causing him to concede that the Philip’s Curve, a long-held theory that inflation and unemployment have a stable and inverse relationship, no longer represents how the economy works today. So, it was no surprise when he announced that the Fed has abandoned its precise 2% inflation policy and moved to an average inflation target. 

This significant policy change means the Fed intends to let inflation “run hot” by drifting above the 2% range before making any moves. It will likely maintain a zero-interest-rate policy until it actually observes a sufficient rise in inflation, rather than acting pre-emptively to address possible future inflation. As a result, it’s probable that interest rates will remain at low levels for several more years.

In our last commentary, we listed a number of programs enacted by the federal government early on in the pandemic to help Americans get through this crisis. However, in recent months, a politicized Congress and polarized negotiations between Speaker of the House, Nancy Pelosi, and Treasury Secretary, Steve Mnuchin, have stalled further action by the Treasury. Chairman Powell and the Fed have made it very clear that in order to achieve a full recovery, further fiscal stimulus is necessary.  As it stands, both sides seem to be stalling until the election, which could prove costly to those in need, and to our overall recovery. With our leadership, our economy, and our health at stake, voters are particularly tuned in to the debate on how we should move forward as a country and who should lead us at this tumultuous time in our history.

Donkeys and elephants bulls and bears

One could argue the election of the President of the United States is always one of the most important political events on the globe.  As the leader of the free world, decisions made under the President could potentially impact global peace, security, and prosperity. It’s no wonder the election receives the amount of scrutiny and angst that it does. In the midst of a global pandemic and recession, this election looms even larger.

Comparing presidents by party

Speaking strictly as investors, is there any wisdom to be gained by studying election cycles to look for clues for managing outcomes? We examined history to find an answer.

There is a popular notion that the stock market will perform better with a Republican in the White House because they tend to be more pro-business. An equally popular notion is that Democrats—who tend to support higher taxes, and more stiff regulation—hinder economic and market growth. Historical evidence does not support either case.

Princeton economists Alan Binder and Mark Watson prepared a detailed study, “Presidents and the Economy: A Forensic Investigation,” analyzing the economy’s performance under presidents of the different parties.  Measuring economic data from 1947 through 2nd quarter 2013, they concluded the following:

Even with this compelling data, Binder, a Democrat, commented that the differential between Democratic and Republican performance was due mostly to “good luck.”

According to The Wall Street Journal, if we assume a two-year lag before a president’s policies affect growth, there is virtually no difference between Republican and Democratic administrations in terms of GDP growth.  For the 1948-2008 period, applying this lag shows 3.4% GDP growth under Republican presidents and 3.5% under Democrats.

Congressional influence

Obviously, the Executive Branch is not the only decision-making body that impacts the economy and financial markets. The political division of Congress can have an influence. According to The Wall Street Journal, from 1948-2008, real GDP grew 3.7% during Republican Congresses and 3.2% during Democratic ones. In this same time period, Republican-controlled Congresses averaged stock returns 7.1% higher than Democratic-controlled Congresses. 

So what’s the winning combination of Congress and the President? The Street provides the following rundown of the performance of the S&P 500 stock index since 1950 with various combinations of government:

Scenarios under a Democratic President

HouseSenateAverage Return
DemocratDemocrat9.10% based on 19 years of data
RepublicanDemocrat13.66% based on 3 years of data
DemocratRepublicanNo occurrences since 1950
RepublicanRepublican19.25% based on 6 years of data

Source: The Street

Scenarios under a Republican President

HouseSenateAverage Return
DemocratDemocrat2.91% based on 2 years of data
RepublicanDemocrat– 18. 37 based on 2 years of data
DemocratRepublican10.31% based on6 years of data
RepublicanRepublican13.81% based on 6 years of data

Source: The Street

Research around historical data on election cycles, combinations of parties in various branches of government makes for interesting reading. However, it bears no actionable fruit in terms of prudent actions. Frankly, it seemed the more digging we did, the more confusing and contradictory the data became, which brought us to the most practical conclusion: Trying to predict the outcome of an election or positioning your portfolio according to historical patterns is simply another form of market timing, which most often has proven to be a fool’s errand.

“Nothing ages so quickly as yesterday’s vision of the future.”

– Richard Corliss, editor Time Magazine

2020 has certainly been an emotionally exhausting year for many.  We continue to mourn the loss of all those who have succumbed to the Covid-19, and we pay tribute to others who remain on the front lines as health care providers and first responders. 

Playing back the year so far, who could have ever imagined we would have endured a global pandemic, the shutdown of our economy and subsequent severe recession, the impeachment of the President, and devastating California wildfires and Gulf hurricanes.

We also tested of our societal fabric with The Black Lives Matter Protests in response to racial injustice, and the rise of the #MeToo Movement culminating in the prosecution of Harvey Weinstein and the death of Jeffrey Epstein.

Through all of life’s opportunities and challenges, it is our duty as your advisor to

We are confident that the future remains bright for those who prepare and stay focused. At Wealth Dimensions, we are committed to this future for you and your family.

As we move forward, you can expect us to continue to monitor your investments and adjust them accordingly in an attempt to reduce volatility. We will also reposition portfolios when opportunities arise with the intent of capitalizing on future upside.  On the tax front, we are staying abreast of the policies proposed by both candidates. Again, you can expect us to be ready with actionable strategies should current tax laws change.

We welcome the opportunity to discuss these matters with you during the review process or at any time you see fit.

As always, we thank you for your continued confidence in our services.

For informational purposes only. Not intended as investment advice or a recommendation of any particular security or strategy. Information prepared from third-party sources is believed to be reliable though its accuracy is not guaranteed. Opinions expressed in this commentary reflect subjective judgments of the author based on conditions at the time of writing and are subject to change without notice. For more information about Wealth Dimensions, including our Form ADV Part 2A Brochure, please visit https://adviserinfo.sec.gov or contact us at 513-554-6000.

Please be advised that this material is not intended as legal or tax advice. Accordingly, any tax information provided in this material is not intended and cannot be used by any taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer.