Talking Points – July 2020

July 29, 2020 – Have Stocks Really Come Too Far Too Fast?

Liquidity provided to financial markets from the Federal Reserve has likely been the biggest determinant of the rally in stocks over the past few months, with fiscal stimulus/relief followed behind.

In our opinion, the next most important driver of stocks recently has been general investor skepticism. Many investors are in disbelief at what stocks have done based on the news headlines they see. This is understandable, but is also a good reason to step back and take a broader view.

Our first chart is a look at the Total World Stock Index. As the green line shows, stocks are trading at the same price levels as more than 30 months ago. Aside from a very brief period during the most fearful time of the selloff, broad stock indexes have essentially traded in a sideways trading range for three years.

Focusing in on U.S. stock markets, we see currently the S&P 500 is actually about 10% below its long-term trend.

Stocks look forward and discount potential outcomes very quickly. The news that you are seeing today has long been factored in stock prices. In fact, the news you will see a few months from now has largely already been factored in the market. There will always be surprises, in both directions, that pop up from time to time. If you continue to wait until all the news is good, by your own definition of good, you will have to accept that stocks will have likely already factored that scenario in long ago and moved on to the next scenario.

July 15, 2020 – Do Stocks Care Who Is President?

At about this point in the Presidential Cycle we inevitably begin to see studies on how stocks performed with each political party in the White House. We have reviewed many of these studies over the years and find this simple chart below an easy way to describe our view on the subject. Whatever your political leaning, it is possible to draw a conclusion in your favor. When we look closely, there are periods under both parties when stocks do very well and periods when returns are just flattish. The one commonality is that over the long-term stocks have eventually gone up and to the right on the chart.

Source: SunTrust IAG

There have just been too few Presidents in history to have a statistically significant study. In addition, there are a long list of other factors to take into account at any given time and isolating just one is very challenging.

There are few topics that we discuss more than the behavioral aspects of investing. Making any broad-based decisions based on politics dramatically increases the risk of making an emotional decision instead of a thoughtful and disciplined approach.

That being said, as we drill down into certain industry groups there will potentially be specific winners and losers, depending on the November outcome. We will continue to evaluate and discuss more in the weeks ahead.

July 8, 2020 – What Happens After The Strongest Stock Quarters?

The recently completed quarter will rank as one of the strongest in stock market history. In all of the previous top ten quarterly returns dating back to 1950, the following quarter was positive in every instance. One year later, nine of the ten periods were positive, with a well above normal average return.

Source: SunTrust IAG

We have remained bullish over these past few months, yet even our positive view was not bullish enough. Stocks love to defy skepticism and that is what has been occurring. There will be periods when the market will need to remind investors of what downside volatility feels like. However, for those sticking with a plan the data above indicate even more positive returns could be in our future.

Source: Greg Towner, CFA, CMT