Navigating a raft in tumultuous white water seems an apt metaphor for what we are likely to experience in the markets coming into the election. Markets, like most individuals, hate uncertainty. The current election during the COVID-19 crisis is undoubtedly going to provide more uncertainty than usual, with the winner likely not known until some time after election day. Mix in one of the most divisive elections the country has ever experienced, and it feels like we are approaching a Class IV rapid.
When approaching white water, you want to make sure that everything in the raft is secure, that the boat is well balanced, and that all team members are ready to paddle. RegentAtlantic has taken many of the same precautions with your portfolio over the past few months by:
- Emphasizing high-quality growth stocks
- Balancing risk in the bond portfolio with U.S. Treasuries
- Maintaining international diversification
- Reducing value and small stock exposures
- Adding to alternative investments where appropriate
The potential volatility of the election has led some investors to think about heading for shore. This can be a riskier maneuver than many think. Even in more normal conditions, it’s tricky to time your market exit and re-entry without getting left behind. We need to remember that not every potential outcome will be detrimental to your portfolio. Many times, our collective initial reaction is not correct; let us not forget that markets initially feared a Trump victory in 2016. Getting the timing wrong could leave investors in much worse shape than if they had stuck out the uncertainty and navigated the rapids.
We believe that current economic conditions make going to cash risky. The Federal Reserve has pumped vast amounts of money into the system to keep the economy afloat, reducing interest rates to near zero. With rates likely to remain low for years to come, investors in cash are forgoing a return on their money.
The flood of Fed monetary policy may also turn inflationary once the current crisis passes. In their long-term policy communication, the Fed has said that it would allow inflation to crest above its 2% target level. This increases the risk of pulling a portfolio out on the shore because you will probably not keep pace with inflation in a near-zero interest rate environment if you are holding large cash balances. To maintain purchasing power, we believe that most investors must remain invested and endure the short-term volatility of the markets.
When the Fed does decide to close the flood gates and raise interest rates, it will happen slowly. The flood of monetary stimulus is likely to remain in the system for a while. After the financial crisis in 2008, the Fed did not raise interest rates until December 2015. The combination of low-interest rates and potential inflation is putting downward pressure on the U.S. dollar. The Fed’s long-term policy of low rates supports U.S. stock valuations and is likely to keep the U.S. dollar on a weaker trajectory. A weaker dollar makes foreign investments more attractive, and we are happy with our international stock allocation.
Rapids don’t last forever, and neither do elections. At some point, clarity will emerge as to which party has won the White House and Congress, and the waters will calm. Once businesses know who is in charge and what the rules of the road are, they are incredibly quick to adapt.
Politics have become increasingly divisive. Many of us customize our news feeds, hang with our constituents on social media, and narrow our focus on the world. This myopic view causes us to catastrophize the negative outcome of “our” party not winning the election. If history is a reasonable guide, the outcome of your party losing will likely be less horrible than you may be anticipating. The reason is twofold. The winning party typically cannot get as much done as promised. Washington is a tough town. Mr. Smith shows up with lots of enthusiasm, but getting things done isn’t easy. The second reason is that people and businesses are resilient. They quickly accept and adapt to change.
Like a group of rafters preparing for choppy waters ahead, the RegentAtlantic team has been adjusting portfolios and preparing for market volatility. We believe these changes have us well-positioned to navigate the election and other challenges of our time. We will stay alert to risks and opportunities that present themselves as we navigate downriver.
I hope you have a healthy, happy autumn season. Please contact your wealth advisor or me with any questions or concerns.
Important disclosure information
Please remember that different types of investments involve varying degrees of risk, including the loss of money invested. Past performance may not be indicative of future results. Therefore, it should not be assumed that future performance of any specific investment or investment strategy, including the investments or investment strategies recommended or undertaken by RegentAtlantic Capital, LLC (“RegentAtlantic”) will be profitable.
Please remember to contact RegentAtlantic if there are any changes in your personal or financial situation or investment objectives for the purpose of reviewing our previous recommendations and services, or if you wish to impose, add, or modify any reasonable restrictions to our investment management services. A copy of our current written disclosure statement discussing our advisory services and fees is available for your review upon request.
This article is not a substitute for personalized advice from RegentAtlantic. This article is current only as of the date on which it was sent. The statements and opinions expressed are, however, subject to change without notice based on market and other conditions and may differ from opinions expressed in other businesses and activities of RegentAtlantic. Descriptions of RegentAtlantic’s process and strategies are based on general practice and we may make exceptions in specific cases.
RegentAtlantic does not provide legal or tax advice. Please consult with a legal and or tax professional of your choosing prior to implementing any of the strategies discussed in this article.