September 1, 2020
How to Know Who Will Win in November
A frequent question from clients, friends and even strangers these days is “what will the election do to the stock market?” History shows us several trends generated by presidential elections. Even if no one knows for sure exactly what will happen, these trends show us what happens, on average, in election years.
On average during presidential election years, stock market returns in September and October when an incumbent is running for re-election, as we have now, average flat to a slightly down bias due to all the election mud-slinging going on.
The financial markets seem to be agnostic regarding which party is in power. What makes investors hold back is uncertainty, and administration changes in Washington bring a lot of uncertainty. If the rules, such as taxes, surrounding a big decision are unclear, you probably feel uncomfortable and are less likely to move forward with your plans. The idea of shifting rules affecting taxes, business and regulation really affect corporate executives making decisions on spending millions or billions of dollars.
So, money flows into the stock market as we approach a big election often slow down, and that can stop markets from going up.
Exceptions to this flat market thesis, such as the stock market crash in 2008, will strongly suggest that a challenger will win as the democrats did in 2008. A strong chance of change gives investors a wait-and-see attitude. If the market gets stronger as we approach election day, that points to a likely incumbent victory.
As for who will win in November, watch the stock market. A large drop in stock prices between now and then means that Joe Biden’s chances are good and a lot of change is coming. A steadier stock market means there will not be big changes in Washington.
College Classes Coming
Zoom into Knowledge
“Fun-damentals of Investing for Retirees” Offered Online
If you want to sit in on the class, Zoom is surprisingly easy to use. All you need is a computer with Internet access. You will be able to see me and the class materials on your computer screen, and if you have a video camera, I and the rest of the class will be able to see you too, if you choose to turn your camera on.
Join us for three 2-hour classes on Thursdays, starting October 1st. And if you have friends who are nervous about the economy or financial markets, invite them to tune in also.
This fun class will help you become more confident making financial decisions. The easy-to-grasp format of this class provides a broad knowledge of investments preferred by investors approaching or already in retirement. Learn about stocks, bonds, mutual funds, annuities and more. Topics include recognizing risk, smart IRA strategies, avoiding common investment mistakes, and simple risk-reducing strategies that anyone can use. Bring your questions.
Here is a testimonial about my class that YC uses on its website:
“I learned a lot that about investing from your class that I did not know from years of watching the TV financial gurus. I only wish that I had taken the class years ago, before making the financial mistakes that reduced my retirement income. You offer a wonderful service to the community of Prescott.” ~MG
3 Thursdays: October 1st, 8th and 15th, 1:00-3:00 pm (online class). Tuition is $45.
Register online with the link below or call the college at 928-717-7755 to register for class #FA20-115.
Register for the class online: Fun-damentals of Investing for Retirees
What the Markets Are Doing
The stock markets had another good month in August, with the tech-heavy Nasdaq index** leading world markets. Whether this great performance will continue is a good question, considering the strong seasonal tendency of September and October to deliver below average results to investors. But because average returns suggest this does not mean it will happen this year. As the old saying goes, “you can drown in a lake that averages only 3 feet deep.”
The Federal Reserve and central banks around the world are feeding liquidity into the system, which often helps financial markets. However, our Fed has not added much financial stimulus over the past three months. If the government approves a new round of Covid stimulus in a timely manner, the markets should respond positively. If it is delayed, or doesn’t come at all, markets might react negatively. Stay tuned . . .
Bond markets slumped in August as interest rates rose slightly due to signs of inflation creeping back into prices. Fed Chairman Jerome Powell, in a speech last week, indicated that the 2% target for inflation is not hard and fast, telling me they are expecting it to tick higher.
The risk from rising rates to bond holders can be shown by 10-Year Treasury Notes. Interest rates on 10-Year Notes rose less than 2/10% between July 31st and this writing on August 30th, causing prices to drop more than 1% in their ETF (Symbol: IEF). That is a multiplier of more than 5x. What will happen to bond holders if interest rates on these Treasuries move from today’s .7% back toward their historic norm of 6%? Huge losses, that’s what. The bond market is nine times the size of the stock market based upon dollars traded each day. Large losses in a market like that can affect us all.
Banks stocks are another bell weather for the broader markets. For several months they have consistently underperformed the S&P 500 index**, underlining the persistent weakness in our economy.
Housing markets in many areas, like Prescott, remain strong, amid reports that big cities are seeing markets soften. Confirming that real estate markets overall are entering risky times, Fannie Mae, which controls about 80% of residential mortgages, has announced a ½% “adverse market fee” for new loans like they did back during the real estate crash that began in 2008. This fee gives them a cushion against a wave of mortgage defaults. We aren’t seeing many foreclosures yet due to government forbearance mandates, but when those mandates expire, watch out!
The Gold rally ended in early August after reaching all-time highs in July. If gold prices pick back up, this would be a good indicator on the future of inflation.
What’s Happening in Your Portfolio
Shock Absorber Growth* clients saw another profitable month, and our model portfolio is at a high for the year-to-date. As of the close of business on Friday, August 28th, we were very close to fully invested with the majority of our holdings in tech, solar and online sales. Our sizable gold holdings from last month were sold off in early August as the gold rally ended.
Flexible Income* accounts were positive by a small amount, but considering that the major US bond index** (Symbol: AGG) lost over 1%, having a small gain is a very good thing.
I am making some changes to portfolios and including two new “Enhanced Index” strategies that move back and forth between the S&P 500 or Nasdaq indexes** and Treasury funds. Both strategies share the risk avoidance characteristics that kept our losses to about ¼ of what index investors experienced during the Covid crash by moving into Treasury funds. And, both offer significantly more growth potential when markets are strong by moving more quickly into fully invested positions as markets bounce. I think you are going to like the results.
If you are not already an HCM client, call today to discuss how these proactive strategies can help you sleep better while your money is working.
And that is how we are staying in sync with this market.
- Shock Absorber Growth* is our 100% growth portfolio.
- Flexible Income* is our 100% income portfolio.
- Adaptive Growth Portfolios* are currently allocated with 80% Shock Absorber Growth* and 20% Flexible Income*.
- Adaptive Balance* is 50/50 between growth and income.
Our Spotlight Strategy – Adaptive Balance
With our Adaptive Balance Strategy we strive to provide high total return from a combination of investments in both the equity and income markets with an emphasis on the income markets.
Our proprietary indicators are used to determine a stock market exposure that adapts to both strength and weakness in the market, directing exposure to the HCM Shock Absorber Growth strategy from 0% to a maximum of 50% of account value. The balance, 50% to 100% of account value, is invested in the Flexible Income Strategy. The HCM Safety Net indicator is designed to warn of sudden potential declines, in which case stock market exposure is quickly reduced.
Click here to read more about Adaptive Balance.
Slice of Life
My wife, Gina, grew up in the San Luis Obispo/Pismo Beach area of California’s Central Coast. With so many travel restrictions in place these days, we decided to take a road trip over there a few weeks back, just before the fires broke out, thankfully. We visited Solvang, the most Swedish town I have ever experienced. We also stopped at one of our most favorite restaurants, The Sea Chest, on the ocean just north of Cambria.
But the real treat was the boutique hotel we found in Avila Beach, one block off the beach. With only 28 rooms, the staff has plenty of time to fuss over you, offering fresh baked croissants for breakfast, munchie platters in the afternoon along with a new bottle of wine every day (we brought a lot home since I don’t drink and Gina is a one-glass-a-night girl), and fresh baked pies at 8:00 pm. They have beach chairs and umbrellas, so we spent quite a bit of time on the beach reading and walking. All in all, it was a delightful trip.
If you are going that way, consider the La Fonda Hotel in Avila Beach. I highly recommend it.
* The model accounts mentioned in this article are hypothetical examples of how the strategy may work as designed. Performance and activity in client accounts may be different from that in the model in amount of each investment, specific timing of trades, and actual security used, which may vary from account to account. Not all trades are profitable. It should not be assumed that current or future holdings will be profitable. A list of all trades in these accounts for the past 12 months will be provided upon written request.
** Indexes are unmanaged lists of stocks considered representative of a broad stock market segment. Investors cannot invest directly in an Index.
This newsletter may contain forward-looking statements, including, but not limited to, statements as to future events that involve various risks and uncertainties. Forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause actual events or results to differ materially from those that were forecasted. Information in this newsletter may be derived from sources deemed to be reliable, however we cannot guarantee its accuracy. Please discuss any legal or tax matters with your advisors in those areas. Neither the information presented nor any opinions expressed herein constitute a solicitation for the purchase or sale of any security.
In all investing, past performance cannot assure future results, and as such, our efforts are not guaranteed. Losses can occur. All strategies offered by Hepburn Capital Management, LLC, adapt to changes in the markets by changing the investments they hold, therefore, comparisons to broad stock market indexes such as the unmanaged indexes mentioned may not be appropriate. Sometimes client accounts are invested in stocks or markets not included in these indexes. Past performance does not guarantee future results. Investment return and principal value will vary so that when redeemed, an investor’s account values may be worth more or less than when purchased. Mutual fund shares and other investments used in our managed accounts are not insured by the FDIC or any other agency, are not obligations of or guaranteed by any financial institution and involve investment risk, including possible loss of principal. Advisory services offered through Hepburn Capital Management, LLC, an Arizona Registered Investment Advisor. Adviser will not transact business unless properly registered and licensed in the potential client’s state of residence.
Copyright (C) 2020 William T. Hepburn. All rights reserved.