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Mid Monthly Update – October 2020

Be Careful What You Wish For?

I write this on Brexit deadline day and those, including the consensus, looking for an eleventh-hour agreement with the EU are set to be disappointed.  Maybe a thirteenth-hour deal after the EU’s Brussels summit will ensue.  But I am not going to linger on that, you can get plenty of informed and ill-informed comment elsewhere.  As you can with Covid-19 infection rates across Europe and especially in the UK.  Statisticians and medical experts appear to differ, with the government trying to steer a middle ground and in the process, inflict as little economic pain as possible.  Who’d be a politician and one on the government’s (virtual) front bench?!

Across the ‘pond’ the Donald Trump show, apologies – I mean the US election campaigning, continues.  We know that polls indicate a Biden/Democrat victory and possibly control of both the Senate and House of Representatives.  But since the events of 2016, trust in polls has diminished – unless it’s an exit poll.  A clear outcome may help equity market sentiment but an interesting fact about market behaviour under previous US Presidents, going back almost 100 years, was brought to my attention earlier this week by the people at Animal Spirits via their social media.

The following table illustrates that whoever the President is, there is a major drawdown in the US equity market at some point in their tenure.  If a President serves for the maximum two four-year terms, it can take a while to happen.  If Donald Trump is re-elected for a second term, you could say that the significant drawdown has already happened. If Joe Biden wins (and given his age, it’s likely to be for one term) there could be a shake out in US equity prices sometime in the next four years – if history repeats itself.

But…

Of course, we also know that equity prices rebound as they have done spectacularly since March this year, although not without some volatility and not evenly either.  The digital economy has been the big winner, but many industries continue to flounder.

By investing in long term in-demand themes, investors can overcome these periodic air pockets.  Trying to time entry and exit points doesn’t normally end well.

Equity investors fixated by valuations and p/e ratios or those pointing to the big six US stocks that have shot the lights out and the four in north Asia, say their performance isn’t sustainable.  Maybe, but companies within the right themes, and not necessarily the bigger companies, have the ability to grow revenue and profits beyond most conventional forecasting.  Typically, they have low debt are not labour intensive and their leverage is one that permits growth from a low-cost base not ever increasing debt.