Making sense of the markets this week: November 9

Each week, Cut the Crap Investing founder Dale Roberts shares financial headlines and offers context for Canadian investors.

Did the stock markets predict the U.S. presidential election?

This past week, the headlines were all about the U.S. election, all the time. I’ve seen so many predictions, including from Polly Pollster’s using artificial intelligence, to traditional polls, to Alan Lichtman’s, which relies on 13 keys to calling an election instead of polls. That method has called every presidential election from 1984. Lichtman predicted that Democrat Joe Biden would win in 2020. Polly Pollster was also in agreement with that call.

And the U.S. stock markets made their prediction as well. The stock market has a fairly reliable track record: Since World War II, when the S&P 500 fell in the three months leading up to the November vote during a presidential election year, the incumbent president or party of the outgoing president has lost the election 88% of the time.

Similarly, when the S&P 500 rises during that period, the incumbent or party of the outgoing president has won 82% of the time. A rising stock market will generally signal a healthy economy and brighter prospects.

The S&P 500 fell 0.04% between July 31 and October 31. That means the market is predicting Joe Biden will win, according to the CFRA Presidential Predictor. And perhaps that stock market prediction might turn out to be very prescient, things are shaping up for a very slim Democratic victory, after a very slim prediction by the stock market.

As of midday Saturday, most media outlets had declared Joe Biden president-elect. The U.S. uses an electoral college voting methodology, in which the first presidential candidate to 270 electoral college votes gets (or keeps) the keys to the White House. Late Saturday morning, the Democrats were at 290, versus 214 for President Trump and the Republicans.

A nail-biter, for an election that many said would deliver a Democratic (blue wave) surge.

Stocks surged on election day

Stock markets don’t like uncertainty, as we’ve mentioned in this space on a number of occasions. In the weeks prior to the election, the majority of polls suggested a strong Biden victory. The markets showed their approval.

On Tuesday, Nov. 3 (U.S. presidential election day) the S&P 500 was up 1.9%, its strongest performance since mid-October. And U.S. stocks continued the rally, delivering a record-breaking surge.

Posted Thursday on TheStreet…

“U.S. equity futures extended gains Thursday, following the biggest post-election surge on record, as investors positioned for a decisive result from the presidential race for Democratic challenger that looks to be tempered by Republican control of the Senate.

“Former vice president Biden, 77, is holding on to a 264 to 214 lead in presumptive Electoral College votes, with tallies still to be confirmed in key states such as Georgia, Nevada and Pennsylvania, all of which would need to turn for President Donald Trump to give him any chance of reaching the 270 Electoral Vote threshold.”

The markets (not liking considerable change and uncertainty) also appear to be in favour of the status quo with respect to the Senate races. It appears that the Republicans will continue to control the Senate as the Democrats continue to control the House of Representatives. (If you’d like to dig deeper, here’s a post from the White House that explains the legislative process. And MoneySense columnist Bryan Borzykowski outlined what a Trump or Biden presidency might mean for Canadian investors.)

Things could change by the time you read this article, but it appears that we are likely to have a new president in the U.S. with no change in control of the Senate or House. For now, we are enjoying the biggest post-election stock market rally.

And certainly there could be a last minute surprise or two. After all, this is 2020: Surprise is the norm.

The Canadian economy cooled off in late summer

The Canadian economy grew in August as real gross domestic product (GDP) rose by 1.2% for the month, Statistics Canada reported Friday, Nov. 6.

From CBC Business…

“That marked the fourth straight month of growth following the steepest drops on record back in March and April amid pandemic lockdowns. August’s figure was down from the 3.1% expansion seen in July. Preliminary information from Statistics Canada indicates real GDP was up 0.7% in September, with increases seen in the manufacturing and public sectors, as well as in mining, quarrying and oil and gas extraction.”

However, we are still about 5% below February levels for GDP.

Full economic recovery is likely not possible until we have COVID-19 under control. There are still so many sectors that are mostly closed for business, or are operating at greatly reduced capacity. There is a cap or ceiling on the level of the total level of economic activity.

When we made sense of the markets for the week of July 26, we discussed how small business was on the ropes. That includes the restaurant industry, which continues to struggle under various levels of restrictions and closures for indoor dining across Canada.

As we head into winter, and the loss of patio traffic, restaurants may face additional pressure.

Canada’s economic recovery might also run into Old Man Winter.

Time to move to developing markets?

A few countries in the developing markets have greater control of COVID-19. And many of these countries are already in growth mode year over year. Most developing-market nations are still below 2019 GDP levels. And now the virus and pandemic is out of control in much of the developed world.

(Check worldometer as a go-to source for keeping track of COVID-19 cases.)

In this Globe and Mail post we read that BlackRock cut its expectations for Europe, and they’ve raised expectations for emerging markets. From that post…

“BlackRock upgrades emerging market equities to overweight, citing the rising probability of Democratic sweep outcome with larger fiscal spending, more stable foreign policy, a weaker U.S. dollar and negative real rates poised to benefit developing market assets.”

And on the fixed income side…

“The asset manager also upgraded Asia fixed income to overweight, saying China and other Asian countries had done better in containing the virus and are further ahead on economic recovery.”

And more than just the short term potential advantage of developed nations, many portfolio managers feel that developing nations offer greater diversification and great long term total return potential compared to developed nations.

You might look to Forstrong Global for some wonderful research and commentary on the future of global economic growth. From their report Super Trends: Around the world in 80 minutes…

“Today many investors are experiencing their own existential struggle with emerging Asia’s economic rise. On the one hand, the region—which we classify as China, India, Taiwan, Korea, Indonesia, Malaysia, Philippines, Thailand and Vietnam—has created enormous growth around the world. China alone has delivered roughly half of all global GDP growth over the last decade. This has been a crucial prop to a growth-deficient world.”

Now, that might not mean that you abandon your non-North American developing markets exposure (I’ll leave that up to you), but you might consider shading in some developing market exposure by way of ETFs. And you may decide to add both equity and fixed developing market funds.

If you’re searching for a Canadian robo-advisor and you like that developing markets idea, you might look to ModernAdvisor. Their portfolios employ that developing market theme with developing market equity and fixed income ETFs.

While I have not made any major portfolio moves in quite some time, I am considering shading that equity and fixed income exposure.

Another election week up ahead?

Every week brings so many interesting headlines, and surprises. Let’s hope that the U.S. election is decided soon. But there is certainly the potential of a hung election and ongoing court challenges. It’s possible the U.S. presidential election will be making headlines for weeks to come.

Through it all, remember to stick to your investment plan, and be prepared for market volatility.

Dale Roberts is a proponent of low-fee investing who blogs at cutthecrapinvesting.com.

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About Dale Roberts

Dale Roberts is a former investment advisor and proponent of low-fee investing. He created the Cut The Crap Investing blog in 2018. Find him on Twitter for market updates and commentary, every day.

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