The Election and The Market
Let’s talk about the election and the market. As you know, the market experiences quite a bit of volatility around election time and we’re here to talk post-election and what that will look like for your investments.
Welcome to our First Friday series, hosted the first Friday of each month by Michelle Bertram. Today she is speaking with Guy Riccardi, Portfolio Manager for United Asset Strategies.
Election Results and The Market
Michelle Bertram: We are live on Facebook for the first time, so hopefully this will go well. After this crazy election, we thought it would be important to talk about how this election has affected the market.
We have portfolio manager here, Guy, who is going to be talking through some of this. Guy, why don’t you just start by sharing your thoughts. I know that we don’t know the results of the Presidential Election yet, but what do we know from the election so far? The market seems to be handling it pretty well, so give me your thoughts on that.
Yes, as you said, there still is uncertainty, but the one thing that we were expecting was that number one, things were a lot closer than what the polling might’ve suggested going into this. As a result, it’s a little messy just on the top level on the presidential side and it’s probably going to be dragged out a little bit in terms of where those results will eventually go. But one positive we did actually see, which was something that was a little unexpected because of the polling, was a little bit of a more balanced result. Even though there could be a flip at the top, we actually saw that it looks like the GOP has a pretty clear path to be able to keep the majority within the Senate.
And then even on the House side rather than becoming more one-sided and more of a majority on the Democratic side, it actually flipped a couple of seats back onto the Republican side. So overall, from that standpoint, we got more balanced results and we didn’t get that “blue wave” or the big blue sweep that people were talking about.
That’s partially why the markets are doing so well. First off, with the economy and society in general, usually, it’s not great to be swinging one way to the other every four years where you’re enacting big changes one way or the other. It’s not a good pathway to keep a stable environment economically, or even from a government standpoint. So what the results are kind of indicating is that it’s getting a little more moderate, which means that it’s going to stop potentially some of these more disruptive reforms that were being talked about, especially on the tax and healthcare side.
And even some of the spending with talking about the new green deal, things like that, without a clear majority, they can’t just pass these things.
I know the talk was a big blue swing and that didn’t happen, at least not at the Senate level. So does it even matter from the market standpoint, what happens with the presidency? Because there’s balance in the Senate and the House, it seems that there should be, not crazy swings in policy changes despite what either president was talking about, is that kind of how you see it?
Absolutely. So that really is where more of the focus has been as a result of the election. We are looking more at what was going on with the Senate even more so than with the Presidency. It was a little bit of a surprise because there was a couple of seats that the incumbent Republicans ended up keeping, so it wasn’t a foregone conclusion even though there was a really strong indication that they’re going to be keeping them.
So that’s exactly right. It’s just that people don’t always like to hear this, but stocks do love the gridlock environment a bit. That’s potentially what this is going to be creating.
If we’re looking more of an optimistic side, this is getting a little bit more to the middle, a more moderate type government where one side can’t just push their agenda. They kind of have to work together. For companies and for stocks, from a planning standpoint, that brings in more certainty because now they don’t have to worry about these big sweeping reforms, at least most likely, at least for the next two years.
And I think that’s one thing, you know, cause the market tends to hate uncertainty and while we’re all still kind of on the edge of our seats in some ways, depending upon which party you align with, this whole Presidential election, voting, all of these recounts, all that stuff, it leaves uncertainty. But because of the Senate, there’s a lot more certainty than we might think as it relates to the market, which is why we’re seeing it respond accordingly. So that’s good news. Right?
It’s good from our standpoint. Regardless of what way you may lean politically, I am optimistic that the trend we’re seeing is more positive because I think both sides can agree that the country has just become very bipartisan and it’s gotten probably even worse than worse.
The trend of this particular election, the way that it’s going, is coming a little more to the middle. If we can bridge that gap a little bit we’ll be better off overall. But certainly, from a market standpoint, it’s pricing out some of these more extreme scenarios that we were having to keep our eyes on and it’s providing more certainty from that standpoint, which is good.
Well, that’s good. Yeah, I think it’s important because a couple of people have asked me, why is the market doing so well? You know everything is a mess.
I think you just answered that because we do have some certainty, we’re not going to see a huge change in the tax law. So that would affect the market in the way that it could affect some of the big companies, but on a side note, it also helps with individuals.
So you’re probably not going to see a big change in the taxes either for the next four years. The tax reform that was signed a couple of years ago was good until 2025.
From what happened through this election we kind of see that that’s probably going to stay that way at least over the next few years.
So I think that gives you some hope too, on the individual side, that you’re not going to see a big change in taxes. There’s probably going to continue to be some healthcare reform as both candidates were talking about that. However, it’s not going to be as drastic because of what’s going on with the House and Senate; the Democrats kind of retain some of the control of the House where Republicans retain control of the Senate. So we kind of have that balance of power, right?
Mutual Funds and The Market
So let’s kind of flip a little bit. I know a lot of people that I talk to, and I’ll have you know that their portfolio mix is just mutual funds, a group of different mutual funds. We’re talking about that from the market perspective.
There are some positives and it’s going to look good with the way things are panning out. However, with anything, we could get into the details, but looking at a higher level there’s always going to be some sectors that are good. Some that aren’t. Some that get hurt, and there’s a lot of that to come.
With people just investing in mutual funds, I don’t like to stop and say, “Hey, the market’s going to be great and you’re fine and dandy,” because that can also give people a false sense of security when there still could be some volatility.
This is especially important within different sectors, as we do know that there’s a lot of overvalued stocks. So what would you say with somebody who has their portfolio and a bunch of mutual funds? Should they be concerned about things and if they are, what would you suggest doing and taking a look at?
Sectors are in a position right now as a result of this election, one particular scenario could have caused a little concern. Some of the sectors that have been leading the way up to this point as a result of the mixed results that we’re seeing right now. We’ve seen a bigger rebound back into some of those sectors, so they are now back up and leading again.
But that goes to my point that it is a positive overall for the market, but it is now once again, starting to price in a little more dangerous because certain sectors continue to lead upwards. If you’re not doing any type of rebalancing and starting to take some of those profits on some of these companies that are now trading at multiples, that is depending on three years of future growth at this point, and going even further now at this point. Being able to invest it into other things that have a little more value is what’s providing a little more for danger within portfolios in this environment.
The hard thing with the mutual funds is it’s very hard to see what they’re actually doing within the particular fund. Are the managers proactively doing that? In a lot of cases, the answer is no because these different mutual funds a lot of times have different mandates. So they may be mandated as a growth fund and as a result, they will continue to ride these stocks up as far as they can go, but they don’t have the ability to be trimming some and putting it into industrials or other names that are at this point.
Maybe still a little depreciated but we start to get some good news on the economic front and just things that are COVID related. Say, we get some better treatment vaccine news that comes out. This is all stuff that could all of a sudden spur what’s called a rotation into more value-based names.
So the answer is, when you’re dealing with individual sectors and individual stocks, you can keep your weightings at the right spots. So all of a sudden you can be overweighted in tech names, growth names that have been working to this point, and continue to have those riding up, but you can also have the ability to start trimming some of those gains, keeping it within the proper weight and redirecting it into things that forward-looking have more room to grow. So with mutual funds, sometimes it’s harder to do that just because you can’t necessarily see what’s going on in them. You’re relying on fund managers that might have a different mandate than you have yourself.
A lot of times these fund managers, even if they see it, have to stick by whatever their perspective says. There are times we’ll take a look at a client’s portfolio and what it’s made up of just to give them some thoughts on where some trouble could be and where some opportunity might be.
Just recently we did it and there were like five different funds, but all five of the funds basically had the same thing in them. Because of the perspectives, they had Amazon, Microsoft, and Apple. Now granted, you see those ends and you’re like, well of course we want to be in them. Yes, but their portfolio was being very overweighted even though they had a bunch of mutual funds.
The fact is that those stocks are almost overvalued and if we’re not careful, we’ll end up giving back all the gains that we made. So what you’re talking about is that those funds are great when you’re growing, when you’re young and you’re just putting money away for the future.
But as you’re getting closer to retirement, then sometimes some of that downside risk management comes into play because you don’t want to give back the gains that you just made. You want to have some of that protection. Inside of the funds, very rarely is there any of that downside risk management. It’s like they’re just trying to beat out the guy next to them, much like on a race track.
Nobody’s actually looking at a marathon and they’re not going to be able to make that marathon because they’ve used everything up at the beginning.
I think that’s kind of how it is when we’re looking at more retirement. We want to have that marathon approach and don’t want to just get all the gains right now and end up falling over like halfway through the marathon because we can’t make it. We want to make sure we’re keeping those things.
Right. Absolutely. The problem with the mutual funds is they don’t know their individual investors, one from the other. It’s just a mark on the record-keeping for them. So the way that they’re competing with other funds within their particular categories, that’s their particular mandate. But they don’t know if somebody who had been working is now entering retirement and actually is now going to be relying on these assets for income.
They can’t because they’re in the way that they’re structured, they can’t know that. So it now becomes more important for that individual who is maybe more growth mandated to that point, to now get it more balanced so that if you’re relying on income now from those assets, you need to be managing not only towards the long-term but looking at the intermediate and even in the short term, once you start pulling income.
Right. I think that that talking to a lot of people entering or in retirement, they don’t want as much risk because they know money is hard to make. I don’t want to lose it because I want it to be there for myself if we need it. Not if I take a big loss. I’m not going to go out back out and make it right. So, keeping more there, it’s not about trying to hit the home run anymore. It’s just trying to make sure that it’s there for when you need it.
You just said something that I think is really key. With a mutual fund, you’re just a name on a page or a number on the sheet. When you work with a team like yours, there’s no “everybody” it just you.
I don’t think you can really get that with any type of mutual fund portfolio. Again, you’re just a name on the sheet versus having managers who know what type of income you want, what’s your downside risk, and what’s your comfort level with all those things.
So, because you put some things in place for your clients and if we do take a turn, you’re not going to take the loss all the way down there. You have some things into place to stop some of that.
Yeah, exactly. So it’s all part of risk management. One of the mandates is diversification. It is an important thing that people have heard of at this point, but it becomes even more important in a scenario like what we’re seeing because it’s very easy to get too over-weighted in one particular area when that one area is doing so much better than the other areas.
It takes discipline to be taking gains and keeping the weightings in a correct ratio along the way. In the long run that’s going to be providing better risk-adjusted returns because to your point, if you’re taking it along the way, you don’t have to worry that when the correction happens you’ve already taken a lot of the gains off of the table.
And guess what? You may have already redirected some of those gains into the positions that are now gaining funds from the correction because usually when corrections happen, there’s a rotation.
The money has to go somewhere. It doesn’t just disappear. It goes from one area to the next. Keep up with those disciplines, make sure that nothing gets way out of whack so that you’re not taking a more proportionate risk than you should be in the portfolio.
From a timing standpoint, you’re selling into strength and redirecting into things that add a little more weakness, and that’s always important when you’re forward-looking. So that’s a big part of the actual risk management within any particular asset class.
I think sometimes that word diversification gets thrown around the industry like pixie dust and people think, “Oh, I’m diversified.”
They have six different funds, but just because you have six different funds does not mean you’re diversified because if all of those funds are doing the same thing, similar to our last review here they had all the same things in them, making them highly overweighted, they’re really not diversified, you know?
It’s really not just diversification, it’s more smart diversification and that you’re doing it in the right ways, watching it continually. It’s not like a set and be done.
That’s like the first year first management, but I know you guys employ a couple of other things, making sure you’re protecting those dependent positions that are there like Amazon, Apple, or some of those things that are really strong and getting a lot of return to that. But we want to make sure that we protect them and don’t just lose all the gains that we had.
There are a few other things that you guys do along the way that I think is important. You don’t stop because you think you’re diversified and therefore you’re safe. First of all, funds alone, don’t make you diversified. You need to know exactly how you’re diversified within those funds.
Yep, exactly. From our perspective, the important thing is really understanding correlations because nobody knows in the short term what the market’s going to be bringing. You can have probabilities and a certain feeling based on different indicators that you’re seeing, but the reality is if anyone says they’re smarter than the market and they know exactly where it’s going then you should probably be running as far as you can from that person because it’s too big of a mechanism.
There are too many variables and factors that are involved in the market for anyone to know exactly where it’s going to be going. But what you can understand is correlations, you can understand that these particular positions will do good in this scenario and these will do well in this other scenario.
It’s important that we have a little bit of both and the blend of what we’re holding is dependent on what are we trying to achieve.
Are we trying to achieve a certain amount of growth in a longer-term perspective? Whereas someone else that has more reliance in terms of income on it, maybe someone who is just entering retirement and needs to start pulling money, it’s really important to make sure that we have enough in position.
If we are seeing a crazy overall market and a big downdraft, we have maybe let’s say up to two years worth of your income per in positions that might be going up during that scenario. So yeah, that provides protection for people.
And is it you and I worked together, we sometimes say, Hey, we got some of the income over here. That’s guaranteed. That’s kind of part of the whole plan. And then the income we’re taking over there, yes, we have two years worth of income or backup expenses or whatever it is so that we’re not, you know, not everything is at restaurant. I think that’s important when we’re thinking about the plan.
Exactly. What I find some of the biggest importance to that is not only the fact that it’s going to be preserving that principle that you can be drawing off of, and you don’t have to draw down at a lower point but a lot of times it’s psychological.
People are not going to be leveraged in the wrong way to then make the wrong decision at the absolute worst time. That is typically what we see with people that have incorrect portfolio allocations. It’s usually when times are bad it gets to a certain point of no return.
At that point, technically, if you’ve written it down that far, you should be holding or even adding to it, if you could, and inherently they have to sell. So the important thing is you should have your portfolio structured so it never even gets to that point where you feel like you have to sell.
Yeah. And that’s where a lot of the things we’re talking about are things that you, as an individual should do.
It’s more complicated than you can probably do on your own. One thing I just want to put out there and kind of end with is this; it’s all of these things that we’re seeing are not something that should be dependent on you yourself. That’s why you have managers. That’s why you have advisors to help with that. That’s why we’re doing these First Friday events and being here.
So if you have any questions, I would say one of the most important things that you can do is this; just do a review and see if you’re actually diversified, how things are correlated, and get a perspective from, Guy or from a money manager on what’s good and what’s bad.
When we do look at your portfolio, Guy, you never advise them to sell it all because we’re better.
It’s really taking what’s there and building around it to make it better. To just take your current portfolio and say, “Oh, the market’s going to be fine” and regardless of your political stance, you think the President’s going to get in and the market’s going to go crazy.
Hopefully, we’ve expelled some of that today, but regardless, you need to get the perspective, have somebody look over it, and manage your portfolio for you because to try to do it on your own isn’t the best idea.
You don’t have to do it all. That’s why we have Guy on the team. You’ll do a review for anybody who wants to know what their funds are; the good, the bad, or how they’re diversified, as well as what you see for their portfolio. You’ll look at things they maybe could take advantage of or things that they should be concerned about. Correct?
Absolutely. Yeah. As you said, usually in any portfolio that we’re looking at, there’s almost never a case where everything is out of whack or it’s all bad. That’s never the case. There’s always some good core holdings that people have. Then it’s just the matter of where there are certain suggestions and where things can maybe be improved a bit just to better get a better risk-adjusted return. That’s what we specialize in and that’s what we help with.
Yeah. Hey, you know, as much as it’s crazy right now with this Presidential election, what happened with the under marketing of the Senate and the House leads to some good stability for the stock market ahead.
At the same flip of the coin here, you don’t want to just rest on that. If you set it and leave it, especially if you’re in that pre-retirement area where you’re assuming that you’re going to be not adding to these accounts anymore and might even be taking income from it, then it’s good to have taken.
Now, as Guy is saying, let’s look now to see if you have some stability and see where your holdings are.
So if we do have another correction, whether it’s like it was in March, which ended up correcting faster than a lot of other times, or something drastic happens and we go into a long, bear market cycle, we never know exactly what’s going to happen.
We want to know where you’re at now. Give us a call and we’ll guide you through one of those portfolio reviews for you spend some time talking you through it.
We want to make sure that you’re okay now when things are stable so that if things go crazy, and eventually there’s going to be a correction, we want to make sure that we’re taking a look at it now to be sure that you’re okay.
So I’ll leave you with a Warren Buffett quote. He says, “Only when the tide goes out do you discover who’s been swimming naked.”
So don’t be caught swimming naked either when the market goes out!
Thank you to everyone for joining in, let us know if you have any questions.
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