We have a new administration in Washington DC that promises sweeping changes to our culture, government and economy. With a divided populace, an evenly-split Senate, and a closely- balanced House of Representatives, it is unclear at this juncture how or which these changes will actually play out.
Many proposed changes would seem to be counter to a thriving economy, leaving investors concerned about how this will impact the market and investments. With this in mind let’s focus on three important lessons we learned just last year. These lessons can be thought of as lifetime lessons that get repeated regularly time after time:
Lifetime Lesson #1: The Economy Cannot Be Forecast
If you had been asked one year ago about the odds of our economy shutting down to the point of having 22 million persons lose jobs almost instantly what would you have said? “Next to impossible” you probably would have replied.
If you had been asked in May of 2020 about the odds of our economy figuring out how to work around the nationwide lockdowns by August, alongside predictions of a 5–10-year recovery period, what would you have said? Again, probably, “next to impossible.”
Now we are being asked how the economy is going to respond to proposed changes. The answer is we don’t—and more importantly—cannot know the answer. I do know that the American economy is strong and balanced, and has survived and thrived through trials and tribulations—we can take heart in that.
Lifetime Lesson #2: The Market Cannot Be Timed
You may remember that the stock began January and February with a continuation of the rally that finished Quarter 4 of 2019. I know of no one who predicted, or even suggested, that the stock market was on the brink of collapse.
Yet, collapse it did as our public health crisis was recognized, beginning February 19 and declining about 33% in about 33 days. Again, I know of no one who predicted, or even suggested, that the decline would end anytime soon.
Yet, end it did. As abruptly as it declined, the market began a furious rebound on March 23 that lasted through the rest of 2020.
It would be terrific if we could have timed getting out the day before on February 18 and getting back in on March 22. But, alas, it has been demonstrated time and again throughout my 40-year career (and well before) that no one has successfully been able to time the stock market.
Now we are being asked how the market is going to respond to the new administration’s sweeping changes. The answer is we don’t—and again more importantly, cannot know the answer.
Lifetime Lesson #3: Do Not Mix Your Politics and Your Investment Policy
Think back to 2009-2010 and the country’s discord over the election of President Obama, who had proposed (and implemented) an unprecedented stimulus and makeover of our health care system. What did the market do during Obama administration? The S&P500 index, for example, gained 167% during his 8-year administration for a compound annual rate of return of 13%+.
It would not have worked out in one’s favor If one had decided not to participate in the market because of an aversion to President Obama.
Think back to 2016-2017 and the country’s discord over the election of President Trump, who had proposed (and implemented) America First policies. What did the market do during the Trump administration? The S&P500 index gained 66% during his 4-yr administration for a compound annual rate of return of 13%+.
Again, it would not have worked out in one’s favor if one had decided not to participate in the market because of an aversion to President Trump.
What the market will do during the Biden administration is anyone’s guess, but I think that a lesson to take from the past couple decades is to not mix your politics with your investment strategies. JR