Has there ever been such a year that tested our investing resilience, emotions and capacity to adapt?
From the March pandemic crash through to the November 3, US Presidential elections, uncertainty and volatility have been the name of the game.
A Blue and Red win in the US election?
I am going to put it out from the start, I really believe no one could possibly place their hand on their heart with any degree of certainty about what the Presidential outcome was going to be, despite strong pollster predictions.
The US stock market became so convinced of a Biden blue wave win, meaning the Democrats would win the House of Representatives and the Senate, also known as Congress. With the progressive agenda of candidate Biden – tax hikes, big tech anti-trust legislation, anti-healthcare policies and a big green package for clean energy; the market sold off pre-November 3.
As the final results emerge, although being contested by the incumbent President in the courts; it looks increasingly like Biden will become President, the Democrats will hold the House of Representatives and the Republicans will hold the Senate.
The stock market loves this result. It’s a heads and tails win. Why? A calm, uniting, almost boring President, who for the next two years at least will not be able to change the status quo, due to the Republican Senate. The risks of anti-market progressive policies have diminished. All the great market friendly policies of President Trump without the fire and brimstone of his theatrical Presidential style.
Beaten down growth stocks, think technology and healthcare stocks, have returned to favour, rising some 15 percent in three days. These stocks found no friends pre- election, even though they delivered some better-than-expected third quarter earnings results.
The Federal Reserve continues to keep interest rates near zero, so the macro backdrop is a growth stock nirvana.
Re the pandemic
The COVID-19 virus is currently intensifying its impact across the USA and Europe in what can only be described as potentially a devastating third wave of infections. As brutal as this will sound, the stay-at-home, work-from-home stocks in the US such as Zoom, Netflix, Peleton, Amazon, Homebase will continue to perform across the winter months.
The US is also very dependent like most of the developed world on another stimulus package to ease the cashflow shortages created through high unemployment of the economic recession. No matter who wins, this will be key to avoiding what some economists describe as a ‘”K” or “W” shaped recovery.
There are some “V” shaped economic bulls out there, but my personal view is the best we can hope for is a Nike swoosh, unless there a vaccine sooner than expected or negotiated fiscal package through Congress in early 2021.
Closer to home
Domestically, there is a real political hope that the stimulus package from the Budget; the boost from the RBA’s rate cut and the Victorian re-openings will create the backdrop for a strong boost to confidence and a surge in retail, consumer spending into year end.
With an estimated one million Australians staying at home and possibly being able to travel at least domestically; small and large business will be hoping and counting on a very “merry” Christmas from the cash registers.
5 ways to cope with the uncertainty
As there is so much, we don’t know re the potential US election volatility, I refer back to my personal playbook of share investing.
- Work with what we do know, guessing the future is too hard in 2020.
- Stick with the shares you know very well. The better you know your shares, the easier it will be to make a decision if the share market becomes volatile.
- Be agile and willing to change your views; these are times when we all should be prepared to expect the unexpected.
- Balance your portfolios to meet your risk tolerance. I personally have some cash waiting to be deployed if there is a self-off.
- Central Banks will remain accommodative into the end of 2020 and into 2021 and beyond.
Thoughts for how to construct your portfolio into 2021
- The biggest hope is an effective vaccine that can be quickly rolled out. Although the rotation in the re-opening shares has been happening, think airports and travel stocks; there will be a considerable further rally for value, cyclical stocks with any expectation that we are going back to normal, pre-bushfires and COVID-19.
- Some surprising re-opening winners. The major healthcare companies such as CSL, Cochlear and Ramsay have all been impacted from lockdowns and relatively underperformed the share market. Ironically the healthcare sector is seen as defensive, but not in 2020, with the exceptions of Sonic, Pro Medicus and Healius,
- Infrastructure and housing (build-to-rent). The budget will support these areas with some brokers preferring Downer as an infrastructure play. Boral is more a turnaround story, James Hardie is a beneficiary of the US housing boom, which leaves Mirvac, that is looking very unloved.
- Banks should benefit from increased home lending, but low interest rates will continue to challenge margins.
- Oil and gas will struggle under potential northern hemisphere winter lockdowns and a Biden win in the US.
- Stockbrokers remain keen on iron ore. My personal preferences are BHP and Fortescue.
- Ecommerce and BNPL stocks have been flavour of the year. Some caution might be warranted if confidence is rattled and after jobkeeper is removed in March.
- Small to mid-cap stocks have been enjoying a huge bull market. There are also a lot of hotly performing IPOs. Remember these are classic bull market conditions. It might be prudent to take the profits and run. Many IPOs take some years for their true colours to become known.
- Last but not least, I believe the quality shares will continue to outperform or be the first to recover in selldowns. For a more detailed analysis of those, my book Shareplicity, a simple approach to share investing will outline all you need to know.
In conclusion, stay safe and well. Hug your loved ones and have a very Merry Christmas. No doubt 2021 has a lot in store. Remember the best thing you can do is never stop investing in yourself.