Elections in Focus | Rates Under 3% | Marks Memo

Election Season: In many recent client interactions, the impending election has been a popular topic of discussion. As often stated, the stock market is a forward-looking animal and to some extent the market already has “priced in” what it thinks will happen. Still, this is only useful insofar as polls and pundits are accurate. We need only to go back to the last Presidential election to see how wrong they can be.

Setting the Stage Before Election: According to Oxford Economics, six key baseline themes are currently present to the markets as we approach the 2020 election.

The pace of recovery has slowed markedly. The economy is contracting 3.5% in 2020, but we expect a relatively soft GDP 3.7% rebound in 2021.
The economy regained two-thirds of the output lost in March and April, but many risks are on the horizon. Fiscal stimulus is expiring. Flu season approaching and election uncertainty is rising.
The jobs rebound has been strong, but employment remains 10.7mn below pre-COVID levels. September gain was only 661k versus 1.4mn in August, and the unemployment rate of 7.9% is still close to previous recession peaks.
Pre-election uncertainty surrounding a fiscal stimulus package could represent a watershed moment for the US economy as fiscal stimulus is expiring and employment is slowing. The absence of additional fiscal aid would constrain GDP by 1.5% over the next year.
A Biden-lite scenario (Biden wins and has roughly half of his policies enacted) sees real GDP growth at 5.7% in 2021. This compares with 3.7% in our “status quo” policy baseline (Presidency/Congress remain same) and 2.3% under a Trump sweep (Presidency + Congress) scenario.
Fed Chair Powell stressed the importance of conditional dovish, forward guidance. The Fed will keep rates at the lower bound until the economy is assessed to be at full employment and inflation has risen to 2% while on track to moderately exceed 2% for some time.

Presidential Market Conditions: We have combed through an abundance of data and charts about performance around US elections: what happens when polls are wrong; data from inauguration to the swearing in; contested elections, and so on. Know what? We found ourselves right back where we started. As the folks at YCharts, who provide incredible data around this topic (two charts included below), noted:

“If you made major investment decisions based on the President’s political party—such as investing more or less money during Republican or Democrat presidencies—you’re probably hurting your portfolio more than helping it… the S&P 500 has consistently grown in value over the long term, no matter who’s in office.”

Rates Drift Lower Still, Housing Activity Jumps: Mortgage rates in the U.S. have hit another record low, per Bloomberg Wealth. The average for a 30-year, fixed loan dropped to 2.81%, down from 2.87% last week and the lowest in almost 50 years of data-keeping, recently stated Freddie Mac. It was the 10th record-low this year. The previous record (2.86%) held for about a month. Cheap loans fueled a housing rally, which has bolstered the pandemic economy even amid persistent job losses. Purchases have soared and millions of current homeowners have been able to save money by refinancing. But surging demand for the scarce supply of properties on the market is pushing up prices, putting homeownership out of reach for many Americans. Lenders have tightened credit standards, presenting another potential obstacle for would-be buyers.

“It’s important to remember that not all people are able to take advantage of low rates, given the effects of the pandemic,” noted Sam Khater, Freddie Mac’s chief economist.

We at Compass Ion Advisors can help you think through a potential home purchase or mortgage refinance. Let us know if you’d like help.

New Memo from Howard Marks: From time to time we sample the research and thoughts of various esteemed investors—some bullish, others bearish. Howard Marks of Oaktree Capital is one such investor who occasionally releases rather thoughtful memos. In a pre-COVID world, Marks was generally bearish on the stock market, thinking we had:

An unusually high level of uncertainty (mostly exogenous and geopolitical)
The lowest prospective returns ever
Asset prices that were full to excessive
Pro-risk behavior exercised by investors aiming for high returns.

In his memo “Coming into Focus”, Marks notes, “The conditions I described above made the markets vulnerable to exogenous shock, and we got a doozy.”

So, after falling off a cliff in March followed by a bounce back, what is Marks thinking of markets now?

“To put into the terms I’ve been using over the last several years, how should the balance be set today between aggressiveness and defensiveness? How should you calibrate the riskiness of your portfolio? As I’m sure is my bias, I lean toward defense at this time. In my view, when uncertainty is high, asset prices should be low, creating high prospective returns that are compensatory. But because the Fed has set rates so low, returns are just the opposite. Thus the odds aren’t on the investor’s side, and the market is vulnerable to negative surprises. This is how I described prior years, and I’m back to saying it again.”

Closing Thoughts: After reading Howard Marks, many of us might be more perplexed and pessimistic than at first, reminding us all to be mindful of our own, respective financial situations and to allow our financial plan to lead the way. Truly, we have seen how resilient our clients’ financial plans prove to be during these tumultuous times. Your financial journey is not defined by the events of 2020, but by the proper calibration of things like giving, saving, spending, and the timing of life events. We remain willing partners at your side to tune your financial plan and place focus on the things that we can control together.