One week ago, uncertainty was the only word for markets. Traders fretted over earnings, COVID, the economy, and of course, the election. Now, after what (so far) qualifies as a garden-variety correction, in which we had seen the S&P fall about 7% from its recent high, stocks have turned around in the early part of this week. If you find yourself scratching your head over the action, you are most certainly not alone.

However, my experience has been that once the market (a) comes to grips with the outlook for the future or (b) realizes that many of the uncertainties themselves are removed, a collective sigh of relief tends to occur. From here, that appears to be what we are seeing in the market so far this week.

Now, we don’t know the outcome of the election. However, the expectations appear to be set. And more importantly, the un-certainty surrounding earnings (especially the earnings of the mega-cap tech names we’ve all come to know and love) as well as the state of the economy have been removed – more or less.

For example, we now know what is happening with the earnings for the leading companies in cell phones, streaming, search, online shopping, and social media. And while the stocks of the big names have pulled back since reporting, the outlook is less uncertain now that we know what the current earnings look like.

In addition, this week’s ISM Manufacturing numbers, which indicate the state of the manufacturing economy, definitely surprised to the upside. As a result, some of the fear of the economy taking another dive may have decreased a bit.

And finally, there is the election itself. I understand that this is one of the most emotional elections in history and that we may not know the outcome for several days. But here’s the key – the stock market doesn’t care. Let me repeat that; The Market Doesn’t Care! At least historically, that is.

Take a look at the chart below put together by Deutsche Bank. The key summation is that in election years since 1952, stocks have rallied nicely after election day into the end of the year – REGARDLESS OF WHO WINS. Judging from this week — it really does look like it doesn’t matter!

And in this election, I will postulate that traders came into this week remembering that although uncertainties/fears remain, there are still a couple ginormous positives out there. Namely, fiscal stimulus and Fed support (FED chairman certainly didn’t change anything in Thursday’s report). And the bottom line is that the closer we get to the post-election period and/or January 2021, the more likely it is for stimulus to finally occur. ‘Nuf said.

 

Ron’s Market Minute – The Dust is Clearing: What Investments are We Looking at for Client Portfolios?

OK, so if we are now entering the strongest part of the year for markets (historically) and we are admittedly bullish now that it appears neither party has all the ammo, the question becomes ‘where are we looking for growth of client portfolios- today’?

We’ve always believed that there’s a better way to invest for your future than to simply buy and hold a (way-too-heavily diversified) S&P 500 Index*.  Yes, I know that there are those who think that buying the SP500 Index seems like a decent idea because you’re investing in 500 of the largest companies in the world. However, global economics, geopolitical concerns, currencies, central bank policies, management teams (etc.) separate the strong from the weak investment themes.  SO… We look at the sectors that make up the Index.  Here’s a chart showing the one-year returns of the 11 sectors:  The column that says ‘% Chg’ gives the return percentage so far for this year.

Which investment sectors would you like to bet on? I’m guessing that you would NOT favor Energy, Financials, or Real Estate as they have badly under-performed and would have (this year) cost you potentially thousands of dollars in returns. Yet, this is the result of owning the whole Index! Over-diversification would have cost a significant amount in market returns. 

The Index has gained a bit more than 14% over the past year. The bottom six sectors in the chart have underperformed that level, so 255 companies in the Index (slightly more than half) are a part of underperforming sectors. Warren Buffett has commented that ‘diversification is a protection against ignorance’, as we have mentioned before. He didn’t mean that to be derogatory, and was only saying that if you do your homework you may choose to target the winning sectors of the market and ignore the rest. 

I believe that’s the better answer. And now you know which areas of the market we are targeting as we move into the strongest part of the investment year.   

Ronald P. Denk, CFP®
Investment Advisor
Denk Strategic Wealth Partners
10000 N. 31st Avenue, Suite C-262
Phoenix, AZ 85051
Phone (602) 252-8700
Fax (602) 252-8701
Toll-Free (877) The-Denk
www.denkinvest.com

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Ron Denk is a Registered Representative, offering investments through Lincoln Financial Securities Corporation, Member FINRA/SIPC. 

Mr. Denk is also an Advisory Representative offering services through Denk Strategic Wealth Partners, a Registered Investment Advisor. Denk Strategic Wealth Partners is not affiliated with Lincoln Financial Securities Corporation.

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Past performance is not a guarantee of future returns.