Stock Talk School: Divided Government = Goldilocks

Join Chris Perras for the 11/6/2020 edition of Stock Talk!

Chris Perras: Good morning. I’m Chris Perras, Chief Investment Officer at Oak Harvest Financial Group here in Houston, Texas. Welcome to the November 6th edition of our weekly Stock Talk podcast: Keeping you connected to your money. At around 32:50 on the S&P 500 last week, I gave you the final chapter in my waiting series, and that was entitled, “Wait No More — This is How Early Bull Markets and Stocks in the Economy Look.” Well, this week as a follow-up entitled, “And so it Begins, Divided Government is Goldilocks.”

For the past four weeks, we have stressed that the increase in short-term volatility that we are seeing into the election is what breeds higher investment return opportunities if one can control one’s emotions and biases. That the period of high or implied volatility is when long-term investors should be pushing their chips and dollars into the market, not abstaining or fleeing the markets. Election day has passed for most of us, and most of the votes are in and counted, and while not yet finalized, the outcome looks to be Goldilocks for your money for the rest of 2020 and 2021.

Yes, I know that sounds hard for most of my listeners to imagine. Like myself, most of our clients run with a conservative political tilt. A whole lot of Texas was hopeful that the president would retain his position and while the votes have not been finalized, it looks like the outcome will be a divided government, which is bullish, very bullish for the stock market. A divided government with a democratic president of progressive policies are neutered by a conservative Supreme Court in a GOP-led senate combined with a stimulative monetary policy from the Federal Reserve, that’s Goldilocks.

Why? Because with a blocking position by the GOP, government regulation is likely to stay moderately low. Big liberal programs looking to increase corporate and individual tax rates look less likely. With that in mind, increased supply of stock selling by individuals looking to accelerate gains as an insurance policy into currently low tax rates looks unlikely. Massive taxpayer-funded or borrowing-funded Green Deal programs looks impossible. The likelihood of a more moderate fiscal stimulus program that is jointly agreed on by both party, looks more likely.

All told, there is an increase in likelihood that earnings for the stock market in 2021 and beyond no longer need to be cut but instead, they need to be raised. Finally, compromise and consistency at the federal level would lower overall volatility in financial markets. We all know, lower volatility is a boon for capital investment. We don’t have to think back very far to see what the positive outcome of such a blocking set up in Washington, DC can be. I’ve referenced this time period multiple times the last three months as we tried to educate our clients and listeners as to how the markets aren’t biased politically.

What’s that time period I’m thinking of? Well, it’s the fourth quarter of 2012 through 2013. Why do I keep going back to that time period? Well, during that time period, it’s when President Obama won a second term, but the GOP won control of the House of Representatives, thus blocking almost every far-left economic program suggested during his second term. Remember, listeners, this was early on in the implementation and acceleration of the Federal Reserve’s QE3 program.

Within weeks of the 2012 election results, the real economy as seen in the real growth component of the Treasury markets started accelerating up materially. Likewise, one can see by the chart of the S&P 500 it started to rise almost precisely when this measure of real growth did. Subsequently, the stock markets rose almost exactly 38% from their election period lows over the next 15 months.

Way back in September of 2012, the Federal Reserve announced QE3, but they waited two months before they actually started buying bonds aggressively, and then they executed their program throughout 2013. The real economy accelerated with its normal lag, volatility declined dramatically with its normal lag, and stocks marched almost linearly upward for 15 months by 38% through early 2014. Remember back to the good old days when stocks never seem to go down, back to the days of almost constant underlying bid to the stock market. Remember back when volatility was so low, it looked like it was fake news or fake data. The VIX traded at its normal minimum which is around 12 to 12 1/2, not at its currently elevated level of almost 30.

Remember those days? Remember when you long for a pullback and stocks to buy, a correction of 10% down to invest in some stock you wanted to own, and it never came because the most the market dropped back then was 3% to 5% from peak to trough. Well, that’s what a stimulative market looks like. That’s what consistent government policies look like, nothing like the good old days of consistently boring and profitable.

Listeners, please do not let the upcoming election results, when finalized, become an emotional event or a crusade that drives your short-term financial behavior. This event is another event in time whose outcomes we cannot control. Fight the feeling to change everything based on this election outcome. Why? Because 2021 is loaded to the gills with that keyword I used in last week’s podcast to describe both the post-2012 and post-2016 election economic environments. What was that word? That word was stimulus.

We already know that the Federal Reserve is planning for monetary stimulus in 2021, in 2022, and they haven’t even started implementing yet. We are calling that QE5. Much like 2012 when the Federal Reserve pause before implementing QE3, the Fed is waiting to go all-in in QE5 until the election is passed. Given the current focus on high unemployment rates caused by the COVID virus, the fragility of parts of the traditional economy, particularly travel and leisure, and the blocking position of the progressive left by a GOP-controlled Senate and Supreme Court, I believe there is a high likelihood that many of the talk about increase in taxes won’t happen, or at worst, are deferred into 2022, leaving mostly beneficial stimulus to the markets in 2021.

Historically, even under landslide voting that gives only one-party control of both the presidency and Congress, the Democrats had that in 2008, the Republicans had that in 2016, the newly-elected political party with all that power gets at most one major issue to change the first two years of their presidency. In 2008, the Democrats took all their energy, all their time to change the health care plan and pass Obamacare barely on Christmas Eve. In 2016, President Trump and the GOP spent all their energy in 2017 trying to get the tax cut bill passed, and they did, finally, in February of 2018. That’s when both were the majority in both houses and controlled the presidency.

Both issues were pushed through just barely, and that was it. That’s all they got from their wish list. A divided government is Goldilocks for the economy and stocks because while a government is a necessary part of our lives in democracy, it shouldn’t be obtrusive in our lives in changing the rules of the game constantly. The economy and the stock markets love it when politicians stay out of the way either on their own or by way of the checks and balances that were laid out by our founding fathers over 300 years ago in the US Constitution.

I did a quick search in 2012 and 2013 of just what was going on back then with President Obama and Congress and everything else. Here’s what I found. Here’s a quick note from CNN chief national correspondent, John King, who probably is not a conservative. This was in early 2014, two years into President Obama’s second term. He called Obama O for 2013 in terms of what he got passed from his State of the Union address in 2013. There was no immigration reform. There was no job program. There was no tax reform. There was no increase in minimum wage and no gun control. Nothing got done.

Despite major pushes from the President and the Democratic Party, all told, it was a noisy status quo two years in Washington, DC which led to Goldilocks for the economy and stocks. Lost in the current election noise is the bull case for the fourth quarter of 2020 through 2022. That being that 2020 President, whomever that eventually is, and a divided Congress, whomever that is, put job growth in the economy first through additional fiscal spending or tax incentives, not increases. This is in addition to the Federal Reserve’s monetary expansion.

I will continue to argue, until proven otherwise, that additional fiscal stimulus will be wildly positive for economic growth and the stock market in 2021. This is in addition to Federal Reserve’s $1.8 trillion with a T and additional monetary stimulus they have in store for the next 15 months. Throughout all the financial markets, the bond markets, the stock markets and the commodity markets. Even Bitcoin, we’ve seen this movie and story before, what transpired after the Democratic presidential win in 2012, and in front of Trump’s win in 2016, is happening again behind the scenes. The political party did not matter. All markets can begin with a blue or red flag. Each election period since the great financial crisis in 2008, and 2009 have showed similar patterns in stocks into and out of each elections.

By the second half of 2021 when we have a vaccine for the virus or the fiscal stimulus plan has been formalized and written in stone, the TV personalities will declare the coast is clear, unfortunately, by then, the markets will likely already be at materially new all-time highs, trending higher with the TV pundits declaring that the easy money has been made. Listeners, I repeat what I said last week, there is no easy money unless you win the lottery or inherit wealth. In the stock markets, time and time again, we’re reminded by history, that the easy money is made when others are scared or paralyzed and volatility is high, not low. It’s always easy in the rearview mirror.

Don’t let politics cloud your investment judgment, stay the course, or take advantage of others’ emotions. As Warren Buffett says, “Be greedy when others are fearful.” This is how early bull markets look.

At Oak Harvest, we are comprehensive long-term financial planners. What that means is as our client you and your financial advisor should have a financial plan that is independent of the volatility of the stock markets. If you are retired, or you’re in the process of retiring, give us a call at 281-822-1350, we are here to help you plan your financial future and help smooth the financial path you have into and through your retirement years through customized retirement planning. Many blessings. This is Chris Perras, Chief Investment Officer at Oak Harvest. Stay safe, stay strong.

Speaker 1: The proceeding content expresses the views of the speaker and is for informational purposes only. It is based on information believed to be reliable when created, but any cited data, statistics, and sources are not guaranteed. Content ideas and strategies discussed may not be right for your personal situation and should not be considered as personalized investment, tax, or legal advice, or an offer, or solicitation to buy or sell securities. Investing involves the risk of loss and past performance does not guarantee future results.