Crystal Wealth Newsroom

Staying invested in an uncertain world


Volatility and the US election
Until September, equity markets had continued their upward recovery trend. While there was some volatility – with the Australian market following the US but not to the same extent – it wasn’t until September that we saw the first monthly market sell-off since the March falls.

More broadly, risk rose again as a result of COVID-related shutdowns in the northern hemisphere as well as further talk around the US election, particularly with the reduced likelihood of a further stimulus package passing Congress prior to the election. In the short term, fiscal support negotiations are expected to take a back seat to the election campaign and it is events such as these that have brought some political risk back into the market line of sight.

Reading the US election outcomes is a difficult business (just remember the unlikely 2016 Trump result that surprised most pundits). Nevertheless, there is a view emerging that Joe Biden may well win and the Democrats could also take control of the Senate. This would give them a Senate majority, a House majority and a President – a very important outcome. Under this scenario, the Democrats priorities would include a new stimulus bill to support the economic recovery, probably followed by new (climate related) infrastructure and building initiatives, as well as healthcare, education and pharmaceutical reforms. In the near term, this level of spending would likely be received favourably by markets (and in fact some of it is likely being priced in already).

However, if Trump gets back in it is likely the Republicans continue to hold the Senate without a sufficient majority and policy development (or lack thereof) would remain with the status quo; you’d have a standoff between a Republican president and a Democratic influenced Congress. That would certainly mean more volatility for the markets. Trump may have more negotiating power in one sense, defying the odds again for re-election, however the net outcome would likely be less spending and hence negative for economic growth prospects in the near term.

Finally, and less likely, Trump could retain the Presidency but the Democrats control Congress, and this would likely lead to a more significant stalemate and hence greater market volatility.

Time to manage return expectations
While the US election gathers momentum in the last weeks of the compaign and provides some interesting theatre to observe, COVID-19 remains front and centre currently of most of our lives. The impacts continue to evolve as do the policy responses around the globe. Some industries – such as those driven by technological change (e.g. online retail) – are doing better through the pandemic and will likely remain strong. Others, unfortunately, may never come back (e.g. some businesses within the services or hospitality sector).

In this environment, what’s clear is that the market will be forward looking. Hence, it’s not surprising we’ve had the rebound that we’ve had as central banks shored up the financial system and turned on the liquidity taps and governments quickly got the message that the economy was in crisis and needed support. The global economy has started the long road back since around May 2020 in most developed countries but it’s not going to surprise if we see more market volatility for awhile – remember we’re coming back from a very low base in asset prices across most sectors.

Moving forward, it is important to be realistic about future returns when you have cash anchored at or near zero for the foreseeable future, little inflation and not much reward for long term secure deposits or government bonds. It simply means future returns are unlikely to be at the levels achieved pre-COVID as current valuations are to a large extent supported by the low interest-rate environment. Traditional ‘defensive’ assets simply do not provide the same future return profile in this environment. This means examining other asset classes carefully.

Investors need to stay well diversified and look for opportunities that can emerge as the economy slowly starts to heal. This means being careful not to chase more risk to try and keep the same level of returns, a higher risk proposition. It means being mindful of what level of return may be reasonable for different risk profiles and different assets. What’s important to understand is that your experience of returns over the past ten years is unlikely to drive your experience over the next ten years.

Importance of staying invested
With this market backdrop there are two key factors to model across the various scenario outcomes. One factor that would clearly have a significant (positive) impact on markets would be if scientists found an effective vaccine or treatment program. If this happens, markets could move and move quickly – and if you’re not invested, you could miss out on that movement. This means staying invested.

But on the other hand, it also means looking to try and hedge out any bad news. For example, what if there is a policy misstep in the US, or they can’t pass the US stimulus packages in time to be effective? What if the economic recovery stalls? The markets would react negatively to any one of these scenarios, and hence remaining invested currently involves a balancing act of probable outcomes. The markets will require ongoing government (spending) support and not a return to the ‘austerity’ mindset of the post-GFC world.

It may be tempting to park your money in term deposits and wait for the market to settle down. You might even think you can get a reasonable return by staying out of the equity markets, but it’s tough to see how that can be achieved. The reality is that, even if a vaccine is found, it doesn’t mean the impact and change wrought by COVID will go away. We don’t expect business to go back to the way it was done before, and we need to adjust to the way things are now and will be done in future. Many changes (particularly those driven by innovation through crisis) will in fact be positive and drive the next phase of long term growth prospects.

To make a return now, we believe you need to be invested – but do so carefully and with an eye to what level of risk is involved with any invested position. The investing environment might not feel that comfortable currently but it doesn’t mean the same fundamental investment principles shouldn’t be followed. Volatility and uncertainty will be with us for some time yet.

If you’d like to discuss how the market is performing, and what that means for your investments, please contact the team here at Crystal Wealth, who’ll be delighted to help.

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