A Lesson From Vegas

U.S. stocks are up in the wake of the presidential election. We look to betting odds to highlight why market timing around an event like the election is more akin to gambling than investing.
Contributed by Doug Walters , Max Berkovich ,
Election Day came and went with a positive response from the stock market. Investors appear to like the prospect of a split Congress combined with a Biden presidency. We have been saying for months not to anticipate the market reaction to the election but instead to stay invested with comfort that your portfolio is ready for whatever is ahead. A glance at betting odds underlines this point.
Just prior to election results being released on Tuesday evening, the prevailing belief was that Biden would win the presidency. Betting odds at the time pegged the probability of his victory at 68%. As results began to come in, and it was likely the “blue wave” was not going to happen, the odds flipped. When I went to bed, Trump was the odds on favorite, with a probability of winning at 74%. By morning those odds had flipped again in Biden’s favor. While the desire to get out of the market during times of stress is natural, these betting odds show that such a move would be a gamble. Betting on politics is illegal in the U.S., and we would recommend applying that law to your investments as well.
Stocks are up over 4% since Election Day. Did we know stocks would react so positively? No. We do know that market timing is not investing and that any investor who sat on the sidelines for the election has missed out on positive portfolio performance that cannot be made up. 2020 has provided some wonderful lessons for investors. Whether it was the pandemic or the election, long-term investors have likely benefited from staying invested.
Headlines This Week
Election
- Election Day elicited a positive response from the stock market.
- While the election has not been called at the time of this writing, the most likely scenario is a Biden presidency and a split Congress (a Republican-majority Senate and a Democratic majority House).
- The split Congress is unlikely to overturn corporate-friendly Trump policies (like tax reform), while Biden is a fairly known quantity.
Pandemic
- The US (and abroad) reached new COVID highs.
- On Thursday, 120,000 new cases were announced.
- For now, the market has been more focused on the election, but attention will return to these numbers as the need for economic restrictions increase.
Fed
- The U.S. Fed announced their decision to hold short-term borrowing rates near zero after the Federal Open Market Committee (FOMC) met this week.
- Fed officials noted that the economy continues to recover but remains well below pre-pandemic levels.
- Chairman Jerome Powell reassured investors that the Fed is committed to using all of the monetary tools at their disposal to support the economic recovery.
Jobs
- Employment growth was better than expected in October, as manifested by the unemployment rate falling to 6.9%.
- Hardest hit sectors like hotels, bars, and restaurants saw the biggest increase in jobs. Retail and manufacturing continue to recover, while construction remains strong.
Earnings
- Over 89% of companies held in the S&P 500 index have reported their third-quarter earnings.
- Thus far, S&P 500 earnings have declined by about 6.2% vs. the same period a year ago.
- The Energy and Industrials industries were the main contributors to earnings decline, while Healthcare was the major positive contributor to earnings growth.
The Week Ahead
No Decision
The headlines will be held hostage by ballot-counting and court challenges.
- Markets will continue to react to updated ballot counts.
- With key battleground state’s results very close, expect recounts to begin in several States.
Across the Pond
Preliminary 3rd quarter Gross Domestic Product (GDP) for both the Eurozone and the United Kingdom will be released next week.
- Eurozone 3rd quarter GDP is expected to have declined by 4.3% year-over-year. Quarter-over-quarter isn’t expected to have a U.S.-like 33% pop, but a more measured 12.7% increase.
- The U.K. numbers are also expected to jump 15.8% quarter-over-quarter, but still down 9.4% year-over-year.
Looking for Inflation
Data on inflation, consumer confidence, and jobs will be released.
- After a strong jobs report for October, the weekly results will have to confirm the trend.
- The Consumer Price Index is expected to read a 1.3% inflation rate, far short of the 2%+ target the Federal Reserve would like to reach.
- The Producer Price Index is expected to be even lower with a sub 1% year-over-year reading.
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