The Portfolio Impact of Politics and Pandemic

Jeff DeMaso:
Rising coronavirus caseloads in the U.S. are putting the economic recovery at risk. If that wasn’t enough for investors to contend with, the presidential election is less than 100 days away. Join me, Jeff DeMaso, and my colleague Liz Laprade as we work through these topics in this edition of The Adviser You Can Talk To Podcast. Hello, and welcome to another The Adviser You Can Talk To Podcast. I’m Jeff DeMaso, director of research here at Adviser Investments.

Liz Laprade:
And I’m Liz Laprade, research analyst at Adviser Investments.

Jeff DeMaso:
Liz, always a pleasure to have you on the podcast. It was nearly two months ago in early June, which feels both like a blink of an eye and an eternity ago, but two months ago, you and I discussed how the early stages of reopening the economy was going, as well as providing a little bit of a history lesson on the stock market and past pandemics. In some ways, it seems like a lot has changed in the past two months and in other ways, they haven’t changed much at all. Today I thought we should check in and provide an update on the spread of COVID-19 and its impact on the markets and the economy. Additionally, I know the upcoming election is increasingly on investor’s minds these days, and I’m sure it’s a topic we’re going to discuss more and in depth in future podcasts. But you and I have both done some initial research on elections and the markets that I think would be valuable to share today. So, we’ve got a bit of ground to cover, but let’s start with the coronavirus. Before we dig in on the U.S., can you give me a sense of where things stand globally?

Liz Laprade:
Sure, Jeff. So yeah, it feels like a lot has changed, at least in the takeaways of the coronavirus since the last time we spoke two months ago. Let me start globally, I’ll talk about some of the countries we talked about last time, and then I’ll home in on what’s going on here in the U.S.. So China had a sharp rise in its seven-day moving average of new cases. The last time we spoke, it was averaging about five new cases and it has jumped to about 30 over the last month. So where’s that coming from? There was an outbreak in Beijing tied to a food market in early June, that they have gotten since under control. But now there’s been a new outbreak in the northwestern region of China where cases are still rising, but I think it’s worth noting how they brought the Beijing outbreak under control, similar to how they did well right off the bat with the virus, they sealed off limited number of compounds.

Liz Laprade:
They basically shut down compounds around the epicenter of the breakout, but not the entire city. They focused on tracing and isolation, and they had things like flights and trains refunded and canceled to other parts of the country to keep it contained and anyone leaving the area had to produce a negative test before they were allowed to fly or train anywhere. They definitely acted pretty aggressively on the outbreak and I would expect the same for the new outbreak.

Liz Laprade:
South Korea is still doing really well. They had that nightclub hiccup that I had referenced last time we spoke, but they reinforced aggressive testing and the seven-day moving average has been trending back down ever since.

Jeff DeMaso:
Yeah, I know in South Korea you can compare their baseball season our season. I think they’re about to implement fans into their baseball season where here we’ve been trying to reinstitute baseball, but now that we’ve seen some outbreaks within certain teams and we’re only a week or so in, so definitely difference between South Korea and U.S. in that regard.

Liz Laprade:
Yeah, absolutely. Similar to South Korea, Denmark’s still doing really well. Not too much to say there Germany was doing really well, but they recently had a sudden rise in cases just over the last week, but they are taking it really seriously. Health officials said that the outbreaks have been tied to things like larger celebrations, the return to offices, or visits to health care facilities. But let me just put this into perspective. We’re looking at a moving average of about less than three deaths and under 500 new cases. Compare that to the US where we’re averaging about 800 deaths and over 60,000 new cases. So things are relative when you’re looking at quote unquote “spikes” in new cases.

Jeff DeMaso:
Yeah. I mean, those numbers really stand out, even in China, you were talking about going from five new cases to 30 cases, so different in magnitude of what we’re seeing here in the U.S.

Liz Laprade:
Definitely.

Jeff DeMaso:
I guess what it sounds like is that places that have dealt with the virus well, initially, still aren’t fully in the clear, they still have to take it seriously and act aggressively. As we just noted, in the U.S. we’ve got a bit of a different situation. We’re a bit of an outlier when it comes to developed nations, comparing South Korea, Denmark, Germany. That said, the U.S. is a big country, and we’ve got many different regions that are having different experiences around the virus. Can you give me an update on what’s going on and where?

Liz Laprade:
Sure and that’s a very valid comment, Jeff. The U.S. is definitely the hot spot right now, as far as cases, but different parts of the country have been experiencing different things when it comes to a rise in cases. So we’ve been seeing a lot in the media about a second wave here. To be honest, I just think it’s a resurgence of the first one, because we never truthfully got the first one under control the way other countries have, where they had it down to practically zero, but we did see this uptick back in mid-June. Since then the absolute and seven-day moving average numbers have steadily been increasing.

Liz Laprade:
It did see a bit of a flattening over the last two weeks, but I don’t want to get too excited. That being said, the majority of new cases has been region-specific. For example, the South and West are having big spikes in new cases while the Northeast is still seeing steady declines and flat rates. High-level differences between the rest of the country and Northeast. You look at states like Florida, Georgia, Arizona, they all opened a lot sooner. There was not a consistent wearing of masks across the States, whereas here, I think people, at least in Massachusetts and Rhode Island and New Hampshire where I’ve been, people are taking it really seriously. Those areas, or those states also open things like indoor seating and bars pretty early on, whereas a lot of that is still very much shut down around here.

Jeff DeMaso:
Yeah. I mean, I hope that trend we’ve seen in the last two weeks persists, that would be great news to see. One fact about this testing is that we have at least increased our testing capabilities and are testing a lot more than we were back in the March-April time period. Some people say that because we’re testing more, we’re just bound to find more cases and that explains the increase that we’ve seen. Is that the right way to think about it?

Liz Laprade:
So I want to say it’s great that we’re testing more people. That’s what a lot of these other countries did off the bat that helps them and we’re catching more cases and isolating or quarantining more people. So a lot has been said about the number of tests increasing, but as of mid-June, when we started to see the rise in cases, the percent of positive cases started rising, which means there are actually more new cases. Those have also seen a bit of a flattening in the past few weeks, but while testing has increased, it’s still not as aggressive or available as it was in some of the other countries we’ve talked about. There’s still a backlog building up of people who have to wait in really, really long lines to get tested, or weeks and weeks for results, which just really isn’t very helpful.

Liz Laprade:
Deaths were also on the decline for a while, but they did start also rising in early June, though I will say the death rate is a lagging indicator. So if cases are indeed flattening, then we really won’t see that reflected in deaths for at least a few weeks I’d say.

Jeff DeMaso:
I got it. So the percent of positive is increasing, meaning that new cases really are on the rise here.

Liz Laprade:
Right.

Jeff DeMaso:
Let’s come back to … you mentioned the different states. What are states doing in response? We said, we’re seeing it decrease the past two weeks. What’s contributing to that?

Liz Laprade:
So let’s start with Florida, that’s been in the news a lot. Everything was pretty much open as of recently. They never required masks statewide, although some cities and towns did. They never did contact-tracing, or isolation and lockdown and they opened beaches, bars and indoor dining really early on. You’ve even seen that Disney opened to some capacity. So as cases have started to rise, they’ve started to encourage masks and shut bars back down, but not too much else scaling back. The positive test rate there was nearing about 20%, which they hadn’t seen since March and that’s actually four times the standard for reopening sent by the WHO.

Liz Laprade:
So at this point, they’re actually importing doctors and nurses from other states to deal with the influx of people coming in for testing, people being hospitalized and people in the ICU. But the good news is we have started to see the numbers there decline a little bit over the last week. Similar to Florida, we have Arizona. They also open bars, gyms, indoor activities, parks, youth sports really early on. It was almost sort of like normal there and masks were actually very controversial here. In fact, there were quote unquote unmasked rallies being held at one point where people were gathering to protest against the idea of being mandated to wear a mask. But Arizona has taken steps to try and get this under control more so than Florida. The governor actually issued an executive order at the end of June that prohibited gatherings of more than 50 people again, and stopped issuance of new special event licenses, operations of bars, gyms, movie theaters. At first it was just for a month and then it moved to indefinitely.

Liz Laprade:
He also announced the first day of school for in-person learning delayed until middle-end of August. Then more recently on July 9, he issued an executive order requiring restaurants with indoor seating to operate at less than 50% capacity again. Similar to Florida, we actually have seen their numbers start to decline over the last week. So hopefully these new standards that the governor’s setting out for the state is helping.

Liz Laprade:
What’s really interesting is a state like California. So California is seeing a big resurgence of cases, but I think they handled it really well in the beginning, in March. They were the first state to issue a stay at home order. Yet now the state has surpassed New York as the state with the most COVID cases. They were also the first state in the U.S. to actually do a statewide mandated mask restriction. So, different from Florida and Arizona, they’ve been pretty strict throughout. So it is a little bit surprising to see that cases are rising as quickly as they are.

Liz Laprade:
They opened up later than places like Florida and Arizona, for example, Arizona opened salons and services on May 8, but California waited until May 26. So the research is … I don’t think can entirely be explained by opening too early. It wasn’t until June 12 that they opened gyms and hotels and other recreations, but with cases increasing the governor announced on July 1 that certain counties, so not the whole state, restaurants, wineries, all those sorts of things had to stop all indoor activities and then bars were completely shut back down. Two weeks later, the whole state had to shut all these down. It’s actually been the worst in LA area, where they’ve officially announced that school will not reopen. It will be online only.

Liz Laprade:
The focus on the increase has been on some of the Central Valley working fields, meat packing and warehouses, where workers have consistently had to work throughout this regardless of their health concerns. So the state actually received a grant this Monday, so about two days ago, from the federal government to help slow the spread to fund things like increased testing, sick leave rights, and improvements to protocols, but all of these steps taken so far, we’re really not seeing it working out in the numbers yet, cases are still rising, so that’s an interesting state to watch. Then finally bringing it back home, at least home for Jeff, you and I, the Northeast, which is the best section of the country now in terms of new cases.

Liz Laprade:
Something that I think sets us apart a little bit is that the Northeast back in mid-April, the governors of Connecticut, New York, New Jersey, Rhode Island, Pennsylvania, and Delaware created a multi-state council. So they were all working together to develop a framework for safely and gradually lifting stay at home orders. They were all working in unison and on the same page. Even as areas have started reopening, social distancing and health measures have been strictly followed. Masks for entering any public place, I think has been well-respected. People are getting tested more often. Bars are not open in most places and Maine, which was never really a hotspot, still has a 14-day quarantine retirement if you come to the state. New York City also actually can deny customers service if they’re not wearing a mask. New York is actually open much later than other parts of the state, they only started phase three a few weeks ago.

Liz Laprade:
I did talk about hometown, my hometown of Rhode Island, last time that we talked Jeff, doing really well. Still doing well relative to the rest of the country, but I did see a spike right around the 4th of July, which bummed him out, but sadly doesn’t surprise me. Rhode Island is a pretty popular spot, specifically Southern Rhode Island around the 4th of July. So hopefully that flattens back out, but something worth keeping an eye on.

Liz Laprade:
Obviously Jeff, I’ve talked a lot about what the medical data is telling me globally and domestically, but obviously you and I are not COVID-19 experts or epidemiologists. So now that I’ve given you this whirlwind of what’s going on with the cases, maybe you can talk a little bit about how this is playing out in the markets and the economy?

Jeff DeMaso:
Well Liz, I think we may not be COVID experts and epidemiologists, but that was a very nice recap of what’s going on across this country. Thank you for that. But yeah, so let’s try and bring this back to the markets and the economy. Maybe starting with the economy a month ago, we were talking about bad but better as the dominant trend in the economic data. So the idea that we’d fallen off a cliff in terms of economic the data, we’d flipped the switch and shut down the economy and things were starting to recover and the data was still not good in any sense of that word, but it was better off of this depressed bottom. Unfortunately, I can’t say that that’s the trend right now. The new data we’re seeing is suggesting that the economic progress is actually backtracking a little bit.

Jeff DeMaso:
You can see this in a number of different places. Jobless claims, after their initial spike in March, had been steadily coming down. Every week, we were getting lower and lower numbers, which was great to see but this past week we saw them rise for the first time, suggesting that more people were being laid off again. We can look at credit card data to try and get a sense of spending in the near term. We see that starting also to turn around and start going down again. In the past, we’ve talked about the OpenTable data. So OpenTable’s a reservation and restaurant table management app. It keeps track of how many people are eating out and making reservations to go out. In March, we saw that collapse, as we essentially closed restaurants across the board. Then as we started reopening, we saw people start to go out to eat again, and that data was climbing up, trending back towards normal.

Jeff DeMaso:
But once again, that data has completely flattened out and has actually started to turn down. We think that’s a result of both some of those policies that you mentioned, of bars and restaurants being closed in different states to varying degrees, but we think it also reflects a change in behavior. If people are worried about catching the virus, maybe they’re going to stay in and eat in. We saw that hit to confidence reflected in the most recent consumer confidence survey, which again was rebounding off a very low level. Just this most recent read, which came in yesterday, fell back down almost to the lows that we were at in terms of confidence back in the early springtime period.

Jeff DeMaso:
So regrettably, the economic data is turning back down. I like to talk about it as the economy took the elevator on the way down in March and April, and we’re taking the stairs on the way back up.

Liz Laprade:
I like that.

Jeff DeMaso:
It’s just not going to be a smooth climb back up unfortunately. Of course, on the market side of things, the market has been really shrugging off a lot of this increase in caseloads and faltering economic data. This, what I’d call a tug of war, going on in the markets between on the one side, the virus and the poor economic data and the poor earnings data and on the other side, you have the Federal Reserve and Congress and all the policies that have been in place to try and support the economy and bridge the gap over this recession. We’re recording this on Wednesday morning. The Federal Reserve is meeting today. We expect them to keep the line. We don’t expect any changes in terms of their policy. They’ve been quick to act and firmly behind trying to support the economy, trying to keep markets functioning, I see no reason for that to change.

Jeff DeMaso:
Congress, on the other hand, acted in a big way in March and April enacting stimulus packages. The CARES Act was the big one, about $2.2 trillion. These were designed to bridge the gap over the economy, over the recession and they were designed to say, “Hey, we’re going to put in temporary support in place through July and hopefully we’ll be back to normal then.” Well, we’re not back to normal as you just told us. Congress is back at it, trying to find a way to extend this bridge, pass a new stimulus package. I think we’re going to get something, but it’s going to take time. We’re going to have to see the horse-trading, we’re going have to watch the sausage be made. It’s not going to be pretty, it’s politics in action, but this is an election year. Neither side wants to go to the voters and say, “We didn’t do everything possible to help you in this time of need.” So I expect something to happen, but maybe we can use that as our pivot to talk a bit about this upcoming election.

Liz Laprade:
Yeah and this is something you and I, Jeff, have been looking at, at least in the data side, as far as markets and volatility and what they’re doing around election years.

Jeff DeMaso:
Yeah, let me kick off. I probably started a little bigger picture and you dug a little deeper and let’s just … Two big caveats. One, we’re not trying to predict who’s going to win the election here. We’ve got a long way to go and we’re just not in that business, there’s plenty of other people who are. Second would be just to take some of this data with a bit of a grain of salt. Even though, in my case, I’ve got data going back a hundred years and you’ve got data going back, 50, 60 years in some cases. That sounds like a long time, but in terms of presidential cycles, it’s not that many.

Liz Laprade:
No.

Jeff DeMaso:
So just take everything with a little bit of a grain of salt here. I started big picture and I just asked, how do the markets perform under Democratic versus Republican presidents? Does the market seem to do better under one party or the other? Should I be worried if one party or the other wins? The spoiler alert is that markets tend to do well under both parties. I looked at the Dow Jones Industrial Average, the price return of this index back to 1900 and the average of all years was a 7.4% return. The average under Democrat was 8.8% return on average and then the average under Republicans was 6.2%. So, maybe markets did a little bit better under Democrats, kind of surprising given that Republicans are seen as the party that supports business, or is more business friendly, but nonetheless markets tended to do well under both presidents.

Jeff DeMaso:
Another way of looking at it would be if you invested starting with an investment of $10,000 and you only invest when a certain party is in the White House. If you only invested when a Republican was president, you turned your $10,000 into $96,000 or so. If you invested under a Democratic president, your $10,000 would be worth $419,000. So again, the market did a little bit better under Democrats, but again, I wouldn’t read too much into that. That said, if you just ignored who was president and you invested for the entire time, your $10,000 would be worth $4.1 million.

Liz Laprade:
Wow.

Jeff DeMaso:
That doesn’t include dividends and it really speaks to two points. One is trying to take politics out of your portfolios and your decision-making. I know that’s very difficult, but it also just speaks to the power of spending time in the markets. If you were just investing when a Republican president was in the White House, you were out of the market roughly half the time, and you want to give compounding as much time as possible to really build your wealth over time. So, that said, I know emotions are high. It’s easy for me to sit here and say, “Just ignore who’s in the White House,” but that comment probably ignores human emotion and reality.

Liz Laprade:
[crosstalk 00:22:41].

Jeff DeMaso:
So I know you took a slightly different angle and we often hear that when an election is coming, investors should just get ready for volatility. I’m sure I’ve said that before, it sounds right. But is it really true? Does the data bear that out?

Liz Laprade:
Right, yeah. It’s definitely something we hear a lot leading up to an election, this idea of uncertainty and fear in the market. But yeah, what I did when I dug into the data, same sort of data set you were looking at Jeff, markets were actually not more volatile on average, particularly if you pull out 2008, which was a five to nine standard deviation event and back in that year, it was really hard to extrapolate the volatility related to the financial system collapsing versus the actual election, but still on average markets, were really not more volatile during the election years than other years.

Liz Laprade:
So we get that data, right, that’s interesting but what happens is people say, “Well, maybe this time’s different. Everyone’s uncertain, there’s fear.” If that was the case, then I would imagine the market wouldn’t, at least the stock market might not, do so great because people are probably buying safer assets. So what I did was that I looked at how markets actually performed in and around election years.

Liz Laprade:
There’s actually some evidence that you may want to avoid stocks in October, which is the month right before the election but it did note that markets tend to do better than average in this like honeymoon period. So between the actual election in November and the inauguration, but overall, stocks still tended to do better than bonds in and around elections. So the takeaway is that an election coming up isn’t on its own a reason to really avoid the stock market, which is what I think you were getting to.

Jeff DeMaso:
No, thanks Liz. I think that perspective is valuable on not necessarily seeing more volatility around elections and again, another reason why you might want to stay invested in the stock market.

We’ve covered a ton of ground. If I’m going to try and put a bow on this podcast, it’s not super clean, but maybe the connecting thread that I’m seeing here is that there’s actually always a good reason not to invest. Today’s reasons a pandemic, the election, that sounds compelling and it’s always the case. I’m reminded of a Michael Lewis quote, which goes, “How many times does the end of the world as we know it need to arrive before we realize that it’s not the end of the world as we know it?” So yeah, look, we face challenges as a nation and there’s going to be changes that are going to come out of the pandemic and the election. But the market has proven to be an enduring way to grow wealth through time, through difficult periods. We’ve come through stronger and better on the other side, we think that’ll be the case again. So let’s wrap it up there.

Liz Laprade:
Sounds good.

Jeff DeMaso:
This has been Jeff DeMaso.

Liz Laprade:
And Liz Laprade.

Jeff DeMaso:
From Adviser Investments. Thanking you for listening to The Adviser You Can Talk To Podcast. If you’ve enjoyed this conversation, please subscribe and review our show. You can check us out at adviserinvestments.com/podcasts. Your feedback really is always welcome. If you have any questions or topics that you’d like us to explore, please email us at info@adviserinvestments.com. I’d like to give a shout out to Kailey Steele, our editor and producer, who makes The Adviser You Can Talk To Podcast a reality. Thank you, Kailey. And thank you for listening.