Historically, September has proven to be the worst month in the stock market since the late 1800s and so far, the market has been following that pattern “to a T”. U.S. stocks fell sharply yesterday amongst a growing list of concerns that are shaking things up as the S&P 500 builds on its 3-week losing streak.
So, is it just the month of September that has investors squeamish? Or are there real concerns that we should all be paying attention to? Let’s check out some of the latest headlines…
Over this past weekend, officials in the United Kingdom reported that they are now considering another national lockdown as COVID-19 cases in that region are ramping up. Some projections show that COVID cases in the UK could reach 50,000 per day by October and already, the UK government is urging Brits to work from home again. This is, of course, causing volatility in the markets with the most damage being done in the travel and leisure sectors here in the U.S. Another lockdown would certainly mean that companies like Carnival Cruise Lines and airlines such as Southwest and Delta will feel the pain once again. All three stocks took a beating yesterday on that downbeat headline.
Another notable headwind for the markets may be a slow-down or perhaps a dead halt of negotiations for a second stimulus package here in the U.S. as things become more complicated after the passing of Supreme Court Justice, Ruth Bader Ginsburg. President Trump and Senate Leader Mitch McConnell are pushing to fill the vacancy at the Nation’s highest court saying that it is their Constitutional obligation to do so and, now with only eight justices on the bench, it is equally important to avoid potential for a “tie” in any cases heard by the Supreme Court panel. President Trump has vowed to appoint a female judge to fill RBG’s seat.
Meanwhile, Democrats argue that the appointment should be made after the November election making the claim that if Joe Biden were to take the Oval Office, it would be right for him to make the appointment to fill the vacancy. Either way, the stock market doesn’t care for this uncertainty and the infighting and finger pointing which is sure to lead to yet another bitter nomination process ahead of the coming election is concerning as investors watch the next stimulus bill move to the bottom of Congress’ list of priorities – this is essentially leaving many of those out of work and many small businesses ‘high and dry.’
Both parties, since the expiration of the first round of stimulus in July, have been in a deadlocked stalemate to move forward with any other deal at this point and now, according to many political analysists, it is very likely that we will NOT see any follow through on a second bill until after November 3rd as both sides are digging in their heels with only 42 days to go until voters hit the polls.
Another concern is big tech which is posing a separate issue for the overall market. Behemoths such as Apple, Microsoft, Amazon, Facebook, Netflix and Alphabet (the parent company of Google) at one point made up nearly 25% of the S&P 500 Index which is the highest level on record. This had many experienced investors concerned that there was too much concentration in only a handful of stocks and this concern was very simple: A systematic move lower in their share prices would directly result in a drag on the entire stock market.
Over the last few weeks, the month of September has lived up to its reputation once again…Recently, Apple’s stock has declined almost 20%, while Facebook, Amazon, Google, Netflix, and Microsoft have fallen 18%, 16%, 17%, 15%, and 13% respectively. As these tech giants fell from grace, the S&P 500 declined almost 9% this month alone. When markets are driven higher and higher by only a select few stocks, investors need to observe caution. What goes up, inevitably must come down. Remember? “Trees Don’t Grow to the Sky” and that when a small group of stocks collectively are the horsepower that move entire markets, the impact on the downside can make a huge dent in portfolios that are too concentrated.
The fourth concern for the markets is the banking sector. Despite rebounding 30% from the March 23rd lows, the banking sector is still down over 25% from its peak in late February. The Federal Reserve’s zero percent rate policy has, once again, put pressure on bank stocks as their net interest margins (or profitability on mortgages and term loans) has contracted. As a result, banks, in general, have struggled to bounce back and did not fully participate in the massive rally that we saw going into the end of August.
Adding insult to injury, yesterday, on the heels of a report finding a number of financial conglomerates allegedly involved in illicit transactions, major banks including JP Morgan, HSBC, and Deutsche Bank were named among others in a claim that they allowed for the “flow of dirty money” through their systems. The investigation, led by the International Consortium of Investigative Journalists found that the banks’ internal compliance departments identified more than $2 trillion in transactions as “red flags” from as early as 1999 and into 2017. These transactions have been classified as potential money laundering or other “criminal activity”. In yesterday’s trading, shares of Deutsche Bank dropped almost 8%, while JPMorgan fell around 5% for the day.
Lastly, the elephant in the room: The 2020 Presidential Election. With 42 days to go, investors are weighing the pros and cons of a Trump re-election versus a single-term tenure and a Biden win. Many political pundits are pointing, once again, to the polls in an effort to predict the winner but, regardless of what the “crystal ball” is telling them, one thing is most certain: The next president of the United States will be faced with a pandemic that has killed almost 200,000 Americans and our economy is struggling to stand back up on its own feet with millions of American workers still unemployed and many small businesses barely alive.
“There are few times in recent history where we have approached a presidential election with so many high uncertainties,” said Sam Stovall, chief investment strategist at CFRA Research.
During election years, clients often ask us what political scenario would be best for the stock market and based on history, the jury may be out as to how the markets will respond to either a Democrat in office or a Republican. Historical performance of the S&P 500 under either party’s watch is basically split 50/50. The markets have performed positively under both parties and the long-term trajectory of stocks remains upward as Corporate America always seems to “figure it out” politically and adjust their business models accordingly. Public companies don’t have to take sides, they just have to know what’s in front of them.
As I have mentioned in many messages to clients, the advisors at Capstone focus on risk management and we recognize that this election season is probably going to heat things up in the markets one way or another. Having said that, let’s take a look at some potential scenarios going into November:
- Trump Wins and Republicans Maintain the Senate:
If the current status in D.C. remains as is, with Trump holding the Oval Office while Republicans stay in the Senate and Democrats remain in control of the House, the markets will probably see a relief rally on a “no news is good news” outlook. According to analysists’ consensus, the markets might see an immediate breather to the upside of around 3-5%.
In fact, Ryan Detrick, chief investment strategist for LPL Financial, recently said “Markets don’t like uncertainty, and while Trump’s negotiating style has been unpredictable at times, his commitment to lower taxes and deregulation may provide a consistent, market-friendly policy environment”. Many Wall Street analysts agree that if Trump is re-elected, technology, defense, and financials can lift, while pharmaceuticals, based on Trump’s war on drug pricing, might take a hit.
According to CFRA data going back to 1944, Republican presidents with a split Congress has resulted in an average gain of 5.3% per year for the S&P 500. Stocks, under that scenario, have rallied around 60% of the time, post-election.
- A Biden Win and Blue Wave:
If Joe Biden takes the White House, and the Democrats take over the U.S. Senate while retaining the House, we might expect the markets to initially decline. According to many political and stock market strategists, if a “blue wave” lands in D.C., we would more than likely see Democratic policy changes which include Biden’s promise to raise taxes on both businesses as well as individuals and to increase regulation on segments of the economy including oil and gas exploration, drillers, pipelines and the auto industry at large. Also, with former U.S. Attorney General of California, Kamala Harris, by Biden’s side, big tech would be a potential target of increased regulation alongside the pharmaceutical sector and defense. To the contrary, under Democrat control, companies in renewable energy would likely benefit from their majority.
- Biden Takes the White House, Republicans Keep the Senate and Take Back the House (or Vice-Versa):
Many investors and strategists believe gridlock in Washington is the friendliest outcome for the markets.
If Biden wins but the Senate and House stay in Republican control, it’s likely that Biden would be unable to implement his policies regarding taxation and regulation very quickly or at all. That said, in this scenario, a continuation of Trump’s favorable corporate tax policies and rollback of regulations would be expected to continue although Biden, being much less hawkish than Trump, would be more predictable regarding foreign trade.
If a “vice-versa” scenario should play out where Trump wins the White House and the Democrats capture the House and Senate, we should expect a similar outcome due to the veto-power of the President.
If Trump OR Biden take office with a split Congress, the stock market can behave rather well.
According to LPL’s research, “A split Congress historically has been better for stocks, which tend to like checks and balances to make sure one party doesn’t have too much sway,” says Detrick. A divided Congress has resulted in an annual average return of 17.2%, compared to 13.4% for a predominately Republican Congress and 10.7% for a Democratic Congress, all according to LPL’s research.
- Worse Case: A ‘Hanging Chad’ Scenario:
If you’re an experienced investor, you probably remember the disastrous outcome that occurred 20 years ago, when George W. Bush ran against incumbent VP, Al Gore in the 2000 presidential election. After a recount in Florida was mandated, the results were so tight that the outcome wasn’t decided until a Supreme Court decision was rendered on December 12th of that year – FIVE WEEKS after Americans went to the polls. Many investors and voters remember that time when ballots were being examined to determine if a “hanging chad” constituted a vote one way or the other.
During that five-week period, the S&P 500 plunged almost 10% and the tech-heavy Nasdaq lost close to 20% by the end of November.
At Capstone, we have been discussing the possibility of a delayed election outcome and feel that, if by November 4th, we are not watching a concession speech from one side or the other, it will probably be very bad for the markets. The precariousness of this election year is extremely palpable and emotions in our country are extraordinarily high.
In my December 19, 2019 message to clients, I mentioned that “market shocks and economic downturns don’t announce themselves. They typically run us over and we never see them coming…This is why during bull markets it is crucial to be on top on things in your portfolio and not to fall asleep at the wheel.”
After the record moves that we have seen in the stock market, notwithstanding the election, or any other headwinds for that matter, we believe that it makes good sense right now to take a disciplined look at portfolios, be sure that objectives are being met, and risk tolerance is in line with expectations.
For clients of Capstone, we continue to manage portfolios accordingly and responsibly and are here to answer any of your questions. Please call us with any of your concerns or to set up a meeting to discuss your investment and financial plan.
If you are not yet a Capstone client, we are also available for you and can provide you with an unbiased and impartial look at your portfolio at no cost or obligation.
Please call us at (570) 587-7800 (office) or at 888-587-7526 (toll free).
(The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.)