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Prediction is Difficult

“Especially When It Pertains To The Future.” - Neils Bohr

I wish I could write two columns.  One that would be published if Biden won the election and one that would be published if Trump wins.  But this article, which will first appear on Nov 4th, is being written weeks in advance.  So you, dear reader, have an enormous advantage over me.  You know what happened. 

By now you know whether Biden won, Trump won, or if the election is still undecided.  Because that last possibility is the least likely, I will not devote any time or space to it.  And even if that is the temporary situation as you read this, you may still want to read what things may look like under either president once things get sorted out. 

First Things First – “It’s about the economy, stupid!”  Bill Clinton

This year we experienced the worst recession since the Great Depression, but it was also one of the shortest.  The official end date for the recession has not yet been set, but there is no doubt that we are not only out of the recession but most of the way back to where we were before the recession.  Recessions end at their lowest point, when the recovery begins.  During recovery things will always be worse than before the recession started, but as long as we keep growing the economy during recovery and beyond, during expansion, we are not in recession. 

On October 29th, the Commerce Department released the estimate for the 3rd quarter GDP.  Of course, you can check and see what they reported, but I’m writing this before that report so I am stuck with guesses, but the guesses are that the 3rd quarter of 2020 saw some of the fastest economic growth ever reported.  The guesses are the growth rate will be reported at 30% or more. 

And, as is often the case with headlines, that sensational headline looks much better than reality.  I’m not saying the growth wasn’t rapid, but it wasn’t 30% or more for just one quarter.  It gets reported as an annualized number.  So if the actual growth rate for the quarter was 8%, then it gets reported as 32%, which is what you would get if we grew by 8% for 4 quarters.  Very misleading but that’s the way the Commerce Department reports it and the media loves big numbers. 

And 8% is terrific, if that’s what the number turns out to be.  Let’s run with 8% for a moment.  The economy fell a little bit more than 8% in the 2nd quarter.  So we’ll round that down to 8%.  If we fell 8% and then grew 8%, are we fully recovered?  Nope!  100 minus 8% is 92.  92 plus 8% is 99.36%.  So almost, but not quite.

And that last little bit is going to take a lot longer.  The reason is that most of that last little bit is in the travel and leisure sector.  Airlines, hotels, cruise lines, resorts, restaurants, bars, movie theaters, concerts, etc, etc are all waiting for the pandemic to end.  I expect the next 3 or 4 quarters to show growth, but at a dramatically slower pace.  Actually, I think it will be more in line with pre-pandemic growth rates of a little over 2% per year. 

Interestingly, who the president is doesn’t change this forecast much.  But if Biden wins then it matters a lot which party controls the Senate and the House of Representatives.  The Biden economic plan is stimulative.  If his party controls both houses of Congress then he probably gets it all passed and that would create the most growth of all possible election outcomes.  So, for all of our economic well being, I hope that you are reading this knowing that there was a Blue sweep. 

If Biden Wins

In addition to what I just noted, I would expect the following things.  Initially the stock market won’t like it.  The reasons are simple and obvious.  A Biden administration will change things which creates a lot of unknowns for businesses and investors.  We all fear the unknown.  And second, Biden has clearly stated his intent to raise corporate taxes from the current 20% up to 28%.  That will have a direct negative impact on corporate profits. 

But after the initial adjustment in price, next year can be expected to be pretty good for both the economy and the stock market.  More on that below.

If Trump Wins

The initial reaction of the market should be positive because a Trump victory means a continuation of the policies we have in place.  The known will be seen as stability and that will be seen as preferable to change. 

And next year I would anticipate a continuation of the economic recovery, but I do not think it will be robust as it could be under Biden, and so I do not think the stock market will be as strong as it could be. 

Finally, I thank Ycharts for the research and this graphic.  They looked at stock markets under Republican and under Democratic presidents going back to 1950.  Here’s what they found. 

For some reason, investors initially prefer Republicans, as demonstrated by the fact that between election day and the inauguration, the stock market has done better when a Republican is elected than when a Democrat is elected. 

This is rather odd because as you can see, stock market returns have been more than twice as good under Democrats than under Republicans over the last 70 years. 

 

Hal Masover is a Chartered Retirement Planning Counselor and a registered representative. His firm, Investment Insights, Inc is at 508 N 2nd Street, Suite 203, Fairfield, IA 52556.

Securities offered through, Cambridge Investment Research, Inc, a Broker/Dealer, Member FINRA/SIPC. Investment Advisor Representative, Cambridge Investment Research Advisors, Inc., a Registered Investment Advisor. Investment Insights, Inc & Cambridge are not affiliated. Comments and questions can be sent to hal.masover@emailsri.com These are the opinions of Hal Masover and not necessarily those of Cambridge, are for informational purposes only, and should not be construed or acted upon as individualized investment advice. Investing involves risk. Depending on the types of investments, there may be varying degrees of risk. Investors should be prepared to bear loss, including total loss of principal. Past performance is no guarantee of future results.

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