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An End to the Weakest Part of the Year

| November 02, 2020

Historically speaking, the six months from May 1st to October 31st re the weakest for the markets, while November 1st to April 30th are the strongest. We come off a year where the markets had the fastest move from a new all-time high to a bear market. That was “all they way” back in March (seems like a LONG few months) when we closed most of the economy for the virus and saw our 2nd quarter GDP go down by ~33%. We just recently got the 3rd quarter GDP number and it was up roughly the same 33%. For those that get turned around on the numbers, remember that if something goes down 33%, it has to go up 50% to get back to even – so we’re not quite back to whole quite yet.

So yes, it’s nice to see the 3rd quarter GDP number come in at 33%, but that has to be put in context of how much the economy previously contracted. With the virus spreading again, and countries in Europe imposing lockdowns once again, we can’t rule out another lockdown here. Of course, this would have further economic implications – and they wouldn’t be the positive kind! We are not making any health commentary and those decisions are made way above our level, but there will be implications no matter how we continue to handle the virus (at least until an effective vaccine is developed).

As we look at the market, September and October proved to be their usual months and gave us much volatility. So where are we now? Below is a chart of the equal-weight S&P 500 (which you all know we prefer as a better index than the market-weight index). The interesting thing to look at is that the momentum indicators (shown by the red arrows) have started to turn up. That may be showing a bottom (over the short-term) and that November may lead to better markets.

The outperformance that we have mentioned many times over the last year plus of the five largest companies are starting to show some cracks in their charts (as seen below). They are still holding support, but their charts don’t look great and are at risk of breaking down. That would represent a risk for the S&P 500, as fully 22% is still in the top five stocks. I would guess that the market-cap weighted index would underperform its equal-weighted counterpart as it has for the last couple months.

One question we get is how do we position the portfolio given the Presidential election. Right now, the polls are very close and too close to really know who might win. Without knowing that, it would be hard to position without taking a guess. To borrow a term from our friends at RiverFront, we prefer “process over prediction,” so we are sticking to our process, rather than guessing on the outcome of a binary election, believing in the long-term durability of the markets. That said, for those interested in one view of how things are setting up for the week ahead, below is the Real Clear Politics view of the Electoral College. You can see that 197 electoral votes are too close to call one way or the other. The election will boil down to a few states. Texas, North Carolina, Pennsylvania and Florida are a few of the keys. Whoever wins those four states will have an inside shot at getting to the necessary 270 electoral votes. We will know more by 11pm Pacific as to which ways the country is going. Stay tuned and don’t forget to vote.

Lastly, it’s clear that no matter how the vote comes out, half the country will not like the outcome. The key is to try and come together as a country and support your neighbors. Regardless of who wins, we will still have a virus on Wednesday and many people will still be out of work because of the effects on the hospitality and leisure industries. Many parents will still be trying to balance their own work with the needs of their school-age kids learning from home. In other words, challenges and opportunities will still exist – and life is better when we tackle these together.

I would like to leave you with one more thing.  It’s a 5 minute video of Bobby Kennedy making a speech after Martin Luther King Jr. was shot and killed.  His words were appropriate then and still seem worth reminding ourselves today.

As always, we welcome your comments and questions. We join you in hoping and praying for the election tomorrow. It’s a sacred right and we hope you have taken the time to exercise it. We have no idea what’s to come in the days ahead, but a few things we do know for sure:

  1. We are blessed to live in this great country.
  2. It’s worth recognizing and celebrating the goodness of our friends, family, neighbors, and fellow citizens, regardless of how they cast their vote.
  3. We remain grateful for you and will continue to work diligently to care for your portfolios and financial plans in the uncertain days and weeks ahead.