by Clint Gharib December 22, 2020
Two years ago, we were in the midst of the December 2018 stock market plunge that per saw the S&P 500 Index drop over 15% from its closing prices Dec 3rd through its closing price Dec 24th as reported by WSJ.com. Coming off worries over the 2018 mid-term elections that saw Democrats take control of the House, panic over the threat of rising interest rates and a trade war with China appear to be the main culprits to the plunge then. Please revisit my 12-29-2018 Update: Snap Out of It for a refresher on this market worry cycle. Since then, the markets have surmounted multiple worries and even a global pandemic so far as companies adapted and central banks and governments injected unbelievable amounts of fiscal stimulus. Now here we are two years later, and election worries and interest rates are like the merry-go-round kids’ song; “Round and around she goes, where it stops, nobody knows.”
Rising Interest Rates Feared
The US Federal Reserve and others have stated publicly again over the past few weeks that they will continue to keep lending rates near zero for the foreseeable future. “Don’t fight the Fed” is one of the most prominent sayings in the markets for a reason. So while the Fed continues to pursue a “lower for longer” strategy with interest rates this fear does not keep me up at night.
Before us now is the Jan. 5th Georgia Senate Run-off’s. It seems analysts and investors have assumed that the US will maintain a mixed government (Democrat House and Republican Senate) so if the run-offs result in a different outcome then I believe the markets could have a knee-jerk negative reaction. Thus, the estimates (e.g. tax rates, regulations, budgets & spending) driving markets currently would change. If this happens, I do not believe that it would be so monumental looking out 6 months as to warrant moving completely to cash now ahead of Jan 5th, because numerous datapoints and history show me pent-up spending by people could be unleashed as the vaccines and herd immunity with Wuhan Covid-19 take place. This could drive markets to new highs during the first half of 2021. That said, I would look to use any significant sell-off form a January 5th surprise outcome, should that occur, to invest selectively. Some of the sectors that may continue to benefit from the current environment are cyber-security, medical sciences, digitization, and e-commerce along with water. Any investment should be evaluated according to each individual’s situation.
In summary, I don’t see higher interest rates as a risk for the foreseeable future but rather a continued tail wind to stock markets. Jan 6th could see a possible panic sell-off in stock markets that I would use to selectively invest in certain areas that have clear earnings visibility. For some investors now may be a time to trim positions back to their intended allocation levels if they have grown outsized during this year, maintain a cash cushion in accounts to be able to invest should there be a near-term sell-off in the markets, and where applicable based on an individual’s situation, possibly even implement or increase downside hedges within portfolios. These are steps I continue to make within portfolios that I directly manage for clients.
With technology today it’s even easier for me to do video calls over the web than phone calls. Should you have questions on your account or strategies like those I’ve laid out in this update please contact us at your convenience.
By the way did you know that the song Jingle Bells was originally written for Thanksgiving holiday and in 1857 became tied to Christmas instead? Also did you know that ‘Xmas’ comes from using the first letter in Greek for Christ which is X (Chi) in place of Χριστός (Christós).
I remain grateful to work for you as your advisor and I wish you and yours a healthy and blessed new year.
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