October Letter: A Brief Update Before The Election

By Christopher R. English, President of Lumen Capital Management, LLC

I thought it would be a good time to briefly update my investment thoughts as our elections draw ever nearer.  Just like when COVID-19 began wreaking havoc last spring, I may update you more frequently in the coming weeks if events warrant the extra communication.

First Up - The Election

First, I believe Mr. Biden will win in November. This is not a political statement; it’s simply me counting votes. For months I’ve been saying that I thought the President was in trouble, even before COVID-19 struck. But it’s only recently that investors seem to be coming around to my view. While it’s possible we won’t know the winner on November 3rd, I believe we are going to know sooner than many think, maybe within a few days. The polling and other anecdotal evidence is suggesting a significant Biden victory. I know all about the 2016 analogies, and they could be correct, but the old political scientist in me thinks there’s a higher probability that the pollsters are right this time around. If so, this will likely forestall a long and bitter, drawn-out decision. However, I also think there’s a high probability that the stock market will remain volatile until a winner is declared. Even if we see a political struggle that lasts longer than I expect and stocks decline around the voting, then I think that weakness will create value in good names. I also think that, regardless of the outcome, there are many possibilities for industries and sectors that have been hammered by the virus. 

Then There’s The Economy 

Also, from the market’s perspective at this point, I don’t think the potential for stocks to do well in 2021 necessarily rests on the election outcome. I believe investors will start looking past what could be some hard months regarding the virus into the new year and start anticipating what life might look like on the other side of this current spike in cases. I know this is hard to believe right now because the news regarding infections, hospitalizations, etc., is dire. Remember, though, I have always said the news cycle would get worse before it gets better. Yet, the possibility of a vaccine, better therapeutics, better preventatives (social distancing, masks, etc.), and adaptation will likely lead to some mitigation of the disease. My timeline estimate for this is by late winter or early spring. In addition, the Federal Reserve has signaled that it will remain accommodative toward the economy for an extended period of time. Finally, at some point, all the political winds point toward another massive stimulus package regardless of who is president. If President Trump wins, then we’ll see more haggling after the election. If Mr. Biden wins, then the only issue will be the size of the deal. Absent an unlooked-for event or COVID-19 mutating in a way that changes the trajectory of the disease, then I believe all the issues I’ve mentioned above could potentially lead to a better economic recovery starting in early 2021. Evidence of that is already all around us, but we could see that in a more obvious way by springtime. Furthermore, I think any economic weakness that does show up this winter will be temporary.  

A Market Recap

Year to date, the S&P 500 is up around 6%.   However, the S&P 500 is not currently indicative of the overall equity environment. The economy, as well as the stock market, was derailed in February by the virus. Since then, stock leadership has been narrow and largely confined to parts of technology, certain sectors of healthcare, and some specialty sectors such as eCommerce. Most other sectors and investment styles have struggled. Anything tied to hospitality and discretionary spending has been a disaster (think movie theaters, restaurants, and vacation resorts). 

There is a sizable percentage of the S&P 500 companies still trading well below their 2019 closing price. This doesn’t necessarily show up when you look at financial headlines because major market indices like the S&P 500 are weighted by their market capitalization. At the end of September, the top five companies (Apple, Microsoft, Amazon, Alphabet, and Facebook) were 22% of that index’s market capitalization, all of which were at the right place and right time regarding the virus. As such, these have helped propel these indices higher but have also masked much of the rest of the market’s hard times. An equal-weighted S&P index, such as the Invesco Equal Weighted S&P 500 (RSP), is a better indication of this, as is the better-known Dow Jones Industrial Average. These are basically break even for 2020. 

There are many growth and value-oriented companies that have struggled because they’ve been in the wrong parts of the market due to the virus, not because there is necessarily something fundamentally wrong with their underlying businesses. Many of these stocks have continued to pay their dividends, which overflows into the Exchange Traded Funds (ETF) space where we participate. It is highly probable that many of these securities, as well as the ETFs that hold them, are significantly undervalued right now and have the potential for above-average total returns when the economy recovers. Again, I think we’ll see evidence of that by next spring.  We have either begun to make investments in these areas, added to positions where we already have a presence, or are doing research on how to get additional exposure in these sectors.

I invest money for clients through investment strategies that utilize ETFs. I believe you own ETFs for three purposes in terms of their growth potential: capital appreciation, dividends, and expected future dividend increases. 2020 has put some of this potential on hold, but assuming the virus becomes a manageable event, then it is highly probable these growth characteristics could resume next year. Therefore, regardless of the next few weeks and assuming we’re on the winning track versus COVID-19, I believe prospects continue to be brighter for 2021. 

Finally, while I have given you my current perspective on the markets and what the near future might hold, I want you to know that I stand ready to change my assessments if I feel the facts have changed.  I also stand ready to reevaluate my overall views and portfolio positioning if necessary.

If you have any questions about ETFs or how we create and manage your portfolio, please reach out to me at 312.953.8825 or by email at lumencapital@hotmail.com.

*Long indices related to the S&P 500 in client and personal accounts.  

About Chris

Christopher R. English is the President and founder of Lumen Capital Management, LLC-a Registered Investment Advisor regulated by the State of Illinois. A copy of our ADV Part II is available upon request. We manage portfolios for investors, developing customized portfolios that reflect a client’s unique risk/reward parameters. We also manage a private partnership currently closed to outside investors. Mr. English has over three decades of experience working with individuals, families, businesses, and foundations. Based in the greater Chicago area, he serves clients throughout Illinois, as well as Florida, Massachusetts, California, Indiana, and other states. To schedule a complimentary portfolio review, contact Chris today by calling 312.953.8825 or emailing him at lumencapital@hotmail.com.