Election Year has Positive Implications for Stocks and the Economy

Though many investors may have made money in the past year, most investors (particularly the indexers) have simply made back – plus a few percentage points – what was lost in the final quarter of 2018, when the market plummeted just shy of 20%. On the heels of the significant rebound of global market indexes this year, many investors feel that markets cannot possibly deliver much more upside. Is that true? Are markets overpriced at this point? How will the presidential election affect the economy and stock market? You may find our view surprisingly optimistic…

Just a year ago global stocks and economies were both declining with the momentum and data that typically leads to a recession. Several international economies’ growth fell into negative territory while US growth was cut in half and heading lower. Most of this anemic growth was rooted in central bank credit tightening (the US Federal Reserve had raised rates nine times), along with, in our view, a mostly misguided tariff war. Together, higher interest rates and tariff “taxes” are the perfect ingredients to stop economic growth – and nearly did. No wonder stocks plummeted quickly and much more than normal. We were on our way to a recession (and a much worse stock market) had it not been for the Federal Reserve and other global central banks aggressively reversing policy by lowering rates coupled with resilient US consumption data in the first quarter of this year.

Unleash Economic Growth

Though the Fed has lowered rates multiple times this year, the economy has stabilized but has yet to pick up steam. Usually with several rate reductions economic growth picks up quickly. We believe the “headwind” global economies faced recently rests squarely on tariff “taxes” and the uncertainty that they create among businesses and their leadership. However, given the upcoming election in November of 2020, we believe that this final impediment to faster US and global growth will be removed – unleashing stronger global growth and higher stock prices, something we all look forward to.

Stock Prices Leaving Two-Year Trading Range

After a two year period where stock indexes are up only marginally, there are a number of encouraging data points that can allow stocks to trade much higher. Corporate earnings have grown over the past two years, albeit slower than normal, while stock prices have not advanced much if at all during that period, in most cases. This has caused price earnings ratios (P/E) to contract to a level which is compelling and far from where a market top might be considered. In addition, the tremendous volatility of the past two years, without much upside, has caused significant amounts of cash to stay “on the sidelines” – an additional sign to savvy investors that there is much more upside left. Lastly, historically election years are almost always positive for stock investors as incumbent Presidents seek to boost the economy with fiscal policy – according to our work 2020 will be no exception!

Further Economic Stimulus on the Way

There is little doubt within our team that President Trump and his party fear losing – maybe even more than they enjoy winning. It is in that spirit that we believe that the current administration will do everything in their power to enhance economic growth by November of the coming year. It takes a few quarters for economic stimulus to affect growth, so it’s no wonder that they’ve been quick to push and succeed on resolving Phase I of the tariff war and USMCA (formerly NAFTA) agreements recently. Investors should prepare for more success regarding anything that can further stimulate economic growth – tariff resolution, more tax incentives and the like. A stronger economy will lead to a better chance of re-election, and Trump as well as Treasury Secretary Steven Mnuchin are up to the task.

After two years of little or no return on stocks, we believe investors will be handsomely rewarded (with normal 8-12% pullbacks along the way) over the next year – and not just in domestic company stocks. Overseas stocks are likely to out-perform US indexes and possibly by a wide margin given their attractive, relative valuations. The synchronized global rebound we envision would lead to greater returns in international stocks in both developed and emerging economies. Hence, our global approach to your portfolio.

In terms of interest rates, a stronger global economy should eventually lead to higher interest rates, which would be welcome to those of us who own individual bonds – but treacherous for bond fund investors. If you hold bond funds outside of our management, feel free to touch base with us for a second opinion.

As always we will be aware of the risks despite our more optimistic view by adjusting your allocation, managing your sector exposure and carefully implementing stop loss orders.

We know the past two years have been challenging, but we look forward to the year ahead with optimism and a keen eye and incentive to grow your wealth. If you have experienced any change in your financial circumstances or would like to review your portfolio, please let us know.

We hope that the New Year brings you and your family or foundation great success and we will be working diligently on your behalf.

Your Team at Main Street Research

If you have any friends or colleagues who you feel may benefit from our services, we would be happy to introduce ourselves to them with a no-obligation introductory meeting.