The stock market continued its week long sell off dropping over 3% yesterday. Election uncertainty, COVID fears, and economic malaise all have contributed to the recent weakness in the stock market. While weak recently, the stock market has been on an historic run, up 41% since the depths of the Covid pandemic in March. So where are we headed from here? Let’s take a look at some key facts:
1. The pre-election sell off is not new. The market lost 6% right before the 2016 election. In 2012 it was a 3% loss while in 2008 (during the financial crisis) stocks dropped 25% leading up the presidential election.
2. Because of the strong stock rally since March, stock valuations had risen to historically high levels and were due for a pullback closer to normal levels. Price to earnings ratios have been at levels seen at other market tops such as in 1999. The Shiller 10 year p/e hit 30 earlier this month vs. historical averages of 16 while the forward p/e hit 25 vs. historical averages of 15.
3. Congress failed to pass a multi $trillion support bill for Covid damaged parts of the economy. The stock market had priced in the support. While we are highly likely to get many $trillions more in government and Fed money into the economy and investment markets, it may not be until late 2020/early 2021.
4. The investment market backdrop has not changed. Rock bottom interest rates forced to near zero by the Federal Reserve, still makes stocks look attractive longer term. Investors typically seek out riskier higher yielding (potentially) assets (stocks and bonds) when low risk assets such as money markets, cd’s, and checking accounts pay very little.
5. Sell offs such as the past week are good reminders to assess investment portfolio risk and make sure that risk is commensurate with long term goals and objectives. Diversified allocations to a variety of stocks (growth, value, small, mid, large, foreign), fixed income (corporates, treasuries, foreign, institutional cd’s), and alternatives (commodities, precious metals) keep portfolios balanced.
Conclusion: We may continue to experience volatility as the election plays out and we have fits and starts in dealing with the Covid crisis. Industries such as technology have garnered a lion’s share of stock gains so having strong allocations to the sector is prudent. However beaten down “value” sectors in the materials, energy, and financial sectors offer potentially outsized gains down the road. As such a “barbell” approach utilizing both currently popular sectors such as tech and the aforementioned value sectors makes sense. Protecting downside with fixed income is an appropriate protective strategy.
Again, keeping in mind overall goals and objectives is wise and sound strategy. For participants in MGO’s Road to Retirement Managed Accounts, our firm has structured portfolios to echo this approach while considering appropriate risk in each portfolio offering.
Please contact us with any question you might have!