Thoughts {11.25.20}

Here's a few things that have been going over recently.  

First a sort of election postmortem.  If Donald Trump had been born with Ronald Reagan's personality  and had coordinated a better Federal response to the pandemic he likely would have won a second term in office.  That, however, was not the President's lot.  I believe the President lost the election after the first debate.  Still, the President received the second most popular vote tally ever recorded in a national election.  That the President lost and the Republicans gained seats in the House of Representatives have a shot of having on to the Senate and did will in state elections tells me that the center in this country still holds.  The political party that figures this out may have an opportunity to build a national coalition that could last for many years.

Keeping to that centrist theme, the picks we're starting to see out of the incoming Biden Administration are more middle of the road choices than I'm sure the progressive wing of the Democratic party would like.  Of course to hear conservatives talk this is going to be the most left leaning Administration we've ever seen, but so far that doesn't seem to be the case.  Hard to look at Janet Yellen as the Treasury Secretary nominee and worry about the ghosts of Lenin following in her footsteps.  

The stock market likes what it's seeing as we've seen a vicious rally since the uncertainty of the election has been pushed aside.  What the market likes most of all is the very positive vaccine talk.  Investors are now contemplating a world that starts to get back to normal, likely by next spring.  That normal won't look exactly like the world we left behind last March, but it will be a place where we'll begin to go about our lives in a less cloistered manner than we've been forced to live under in 2020.  

We are now into the best six month period for stocks and traditionally the period between Thanksgiving and year's end are positive.  Probability suggests that pattern should hold in 2020.  However, I'd caution you that nothing about 2020 has been normal so don't discount the possibility that we've taken most of the rest of this year's gains in the past few weeks.

Finally we get to Thanksgiving.  The myths of the holiday tell us the Pilgrims offered up a feast of Thanksgiving after surviving a harrowing first year in the new world.  A little under half of the people that came over on the Mayflower didn't live to see that celebration and we now know the reason they found the land where they settled so unpopulated was that European diseases had made it there first, possibly smallpox, devastating the tribes that had always lived in the Cape Cod region.  Our modern celebration also has its origins in our Civil War.  I think it's fitting to remember both those things as we celebrate all that has been given to us, give thanks to the medical people and first responders who have been the frontline soldiers in this war and remember those who will be missing from our tables this year.

In that spirit I want to wish each of you a Happy Thanksgiving.  This one I'm sure for most of us will be unlike any we've ever experienced.  Certainly many will not be attending a big family celebration this year, but however you celebrate the holiday I hope that for some period of time your hearts are lighter and the food excellent.  We will have a real Thanksgiving celebration in 2021, I suspect with a better appreciation for what the day means then as well.

God bless and safe travels if you're heading out somewhere.

How Much Power Does The President Really Have Over the Economy?

 

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

We are now a couple of weeks past the much-anticipated 2020 presidential election.  In the era of the endless news cycle and our current heightened emotions, there’s a lot of opinions and misinformation flying around.  Given all that’s happened this year, many wonder about how much power any president has to control the economy.  We can’t fact check every tweet coming from the current occupant of the White House, but we can shed some light on how much power the President has over the economy. 

The Limits Of Power

Well, the short answer is: It depends. Presidents are usually awarded praise or denounced as failures depending on the state of the economy during their tenure in the Oval Office. But the modern American economy is a complex, many-faceted system, and the President has more influence over some aspects of the economy than others. 

The stock market and the economy are not the same thing.  However, markets do reflect the current state of the economy. Also, since markets by and large are looking into the future, the President doesn’t truly have as much control over investor behavior as many think (although the choices they make can certainly have short-term effects on investor confidence and market performance, particularly on certain securities and sectors). 

For example, history shows us that the stock market performance at the beginning or end of a President’s term in office isn’t necessarily indicative of their choices. It may have more to do with the naturally-occurring cyclical nature of the economy, socio-political changes, or a myriad of other factors that can impact the market’s performance. Research tells us that there is no trend driving the market returns of a particular political party, and the President probably shouldn’t receive much credit or blame for stock market performance during their term, as evidenced below in the hypothetical growth of $1 invested in the S&P 500 since January 1926 until December 2019.

As you can see from the chart above, the party that controlled the Oval Office didn’t have as much impact on the markets as events that occurred like the Great Depression, World War II, the tech boom in the late 1990s followed by the crash in 2001, and the Great Recession in 2008 followed by the recovery. Similarly, the party that controls Congress also doesn’t show any pattern of market performance.

Which brings us back to our main question. What influence does the President have? Common powers the President does have include (but are not limited to):

• Proposing fiscal policy (i.e., tax law) and regulatory policy


• Appointing Federal Reserve governors


• Responding to external shocks and crises


Fiscal and Regulatory Policy

Upon entering office, the President steers fiscal and regulatory policy. The tax and regulatory policies they propose, if passed by Congress, have major effects not only on how citizens are taxed but also on how businesses are taxed and regulated. For example, President Trump’s Tax Cuts and Jobs Act of 2017 lowered income tax rates for most people, increasing spending power and boosting savings and investments. It also lowered the corporate tax rate from 35% to 21% in an attempt to promote job creation and business reinvestment. 

Additionally, the President oversees regulatory policy, which aims to strike a balance between efficiency and equity. Regulatory policies limit what companies can do in the marketplace in an effort to protect vulnerable consumers, and these policies apply to many industries, such as the finance, manufacturing, and energy sectors. Typically, deregulation is believed by many to be better for businesses, as less regulation frees up resources that can be used for more productive goals, thus boosting the economy. 

Federal Reserve

The Federal Reserve (more commonly known as the Fed) is an independent agency from the federal government that provides the nation with financial stability and flexibility. In addition to supervising banks and other financial institutions, the Federal Reserve oversees monetary policy, which can involve governing interest rates (among other things) to achieve macroeconomic policy objectives, such as hitting certain targets for unemployment levels and inflation rates. 

Although the Fed is an independent agency, the President appoints the seven members of the Board of Governors. Their terms are meant to be staggered and can last up to 14 years to maintain independence from the Oval Office. Of these seven members, the President also nominates the chair and vice-chair for the Federal Reserve. The President’s appointees work to fulfill the President’s goals for national employment, price stability, and financial stability.

External Shocks and Crises

The President is also responsible for making economic decisions in response to external shocks and crises. The President’s response to the current COVID-19 crisis provides an illustrative example. The global pandemic has jolted national economies around the world and affected American citizens across all income levels. The response to this shock was an economic stimulus package known as the CARES Act.  While it is up to Congress to draft legislation such as this, the President is responsible for signing stimulus packages into law, {which he did on March 27} and the President’s administration usually plays a large role through negotiations on what such laws contain as it did here.  This stimulus package offered economic assistance to American individuals, families, and businesses. Other external shocks that might require the President to respond with economic policy include commodity disruption, natural disasters, and warfare.

Financial Planning In Uncertain Times

2020 has been chaotic (to put it mildly), and the current state of American politics is just another thing likely keeping you up at night. Before you start to worry, it’s important to remember that the economy is driven by many complex and interconnected factors, of which politics is only one small component. Ultimately, any President’s tangible influence over the economy is uncertain and difficult to prove, and keep in mind that policies implemented earlier in presidential terms can have long-term, far-reaching effects that current economists may not realize in short-term analyses.

Our team at Lumen Capital Management is serious about our job of stewarding our clients’ finances well, and part of that stewardship involves continually educating ourselves and you about relevant economic changes. If you have questions, we can help answer them. And if you’d like to feel more secure about your portfolio, consider partnering with a financial advisor who takes your full financial situation into account, current economic environment included. If you think our firm would be a good fit for your financial needs, call my office at 312.953.8825 or email us at lumencapital@hotmail.com.

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.

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(1) https://www.forbes.com/sites/kristinmckenna/2020/08/18/heres-how-the-stock-market-has-performed-before-during-and-after-presidential-elections/#7ab8c9b94f86

(2)  https://darrowwealthmanagement.com/blog/stock-market-performance-by-president-in-charts/

Flush With Cash

There's an interesting article over at Bloomberg noting that "The American Consumer is Flush With Cash". It shows that the American consumer has been saving money at an unprecedented rate and had started to do so even before the pandemic hit.  This pretty much also corresponds to earlier studies showing that Americans where they could financially afford to do so stuffed all that earlier stimulus money into their bank accounts.  The article points out that people normally save money in uncertain times and that lower interest rates help as well.  However,  I think is the bigger deal is that there has been considerable less outlets for consumers to spend all that cash.  

Think of all the things people haven't been able to do much of this year; vacationing, going to restaurants bars or concerts, movies etc.  Think of all the big ticket items that have been either canceled or postponed. How many weddings, graduations, birthday milestones or the like are not happening this year.  Then tack on all the money not spent on traveling to get to those events where applicable.  How many billions for example are going to be saved around this country over the next two months simply because people can't get home for the holidays?

The point is all of that money is sitting in bank accounts burning holes in people's pockets.   Buying clothes on line or dropping by your favorite restaurant for takeout doesn't begin to eat into discretionary spending because it doesn't cost as much money.  Going to a nice local restaurant with my bride around me prior to Covid was $120-150 dollar evening.  Take out may be a third of that.  

Let's say that by next spring things begin to look like the new normal after Covid and the world starts opening up by then.  The mad rush to go out and spend at least some of that money is going to likely be an irresistible torrent of cash flooding into the economy.

Is there any historical precedent where consumers were forced to save money because many of their venues for putting it back into the economy were unavailable?  Well there is!  World War II!  During the war rationing and war time restrictions on movement severely curtailed consumer spending.  Back then consumers didn't spend money because there wasn't much to spend it on.  Everything was being diverted to the war effort.  Consumers had four years of savings to spend at the end of the war and spend it they did.  While there were mild recessions in the years following that war's end, the US and the world economy boomed in those subsequent years.

We need to contemplate that history may repeat itself in the next few years.

Armistice Day

An earlier generation knew that the holiday that we now call Veterans Day came from  remembering the commencement of an armistice that ended the hostilities on the Western Front during World War I.  The Armistice began on the "eleventh hour of the eleventh day of the eleventh month" of 1918.   In any parts of the world they still take two minutes of silence at 11:00 AM to honor the more than 20 million people who died in that war.  Today's post is a repeat of an article we've published since 2006:

Most of the world has never heard of John McCrae. A Canadian of Scottish descent whose family had a history of military service, John Alexander McCrae was both a physician and soldier. McCrae served in the Second Boer War and World War I. He also taught medicine at the University of Vermont and McGill University in Montreal.

However, McCrae is not remembered for being either a soldier or a physician. McCrae was appointed as a field surgeon in the Canadian artillery and was in charge of a field hospital during the Second Battle of Ypres in 1915. There, touched by the battle death of his friend and former student, Lt. Alexis Helmer, and inspired by the red poppies that grew in profusion near Ypres, McCrae wrote one one of the best known poems to come out of the “War To End All Wars”……

In Flanders fields the poppies blow

Between the crosses, row on row,

That mark our place; and in the sky

The larks, still bravely singing, fly

Scarce heard amid the guns below.

We are the Dead. Short days ago

We lived, felt dawn, saw sunset glow,

Loved, and were loved, and now we lie

In Flanders fields.

Take up our quarrel with the foe:

To you from failing hands we throw

The torch; be yours to hold it high.

If ye break faith with us who die

We shall not sleep, though poppies grow

In Flanders fields.

In 1918, while still serving in the same field hospital, McCrae caught pneumonia and meningitis and died. Poppies, particularly in Commonweath Countries are still used as symbols of the Great War and are still closely associated with Veteran’s Day here in the United States.

Please take a moment today to remember all of our soldiers past and present. Especially remember those who have made the ultimate sacrifice in the service of our country.   This year let's also remember our medical people and 1st responders.  In many ways they're also now veterans of a war.

God Bless to you all and stay healthy.

First Thoughts After Our Elections And The Markets

Wonderful news out of Pfizer this AM related to their vaccine.  If the news stays this good on the inoculation front then we can start to see the beginning of the end of the pandemic.  We're not going to know for a longer period of time when we have Covid under control, but the question of "IF" we'll ever get the better of the disease is now starting to look less likely.

The stock market is up big on this news.  The resolution of the election is also helping.  Regardless of what the President is saying, he is unlikely to prevail in his legal challenges to the vote count, while so far the circumstantial evidence of massive voter fraud does not seem to exist.  The President may not believe this but you can tell by the actions of many institutions in the Federal Government, certain prominent Republicans and even members of his Administration that they know further resistance is a very long shot.

I keep hearing about how divided we are as a country yet it looks to me like this election was decided by those in the center who split their tickets for divided government.

If demographics is destiny then the GOP should be very worried.  The Republican brand has been severely damaged amongst young people.  It will be interesting to see what percentage of voters under 35 voted Republican.  It was hard to ignore the ages of all those people spontaneously celebrating in cities around the nation after the race was called for Biden.

We're going to get a stimulus package if not before the end of the year then soon into a new Biden Administration.  The prospect of that, better economic times ahead, favorable seasonality and the possibility of a vaccine should create a positive environment for stocks.

I will more to say on this in the coming days.

Why The Rally

We're seeing stocks rally into today's open.  This would seem to fly in the face of all the election uncertainty we've been stuck with for the past several months.  What I think the markets are telling us this morning by their performance is that we'll know relatively soon after the election who has won.  I'm not saying you're going to wake up Wednesday morning and know who's going to be the next President I think there's a fairly strong probability we won't know that.  But I'm guessing we'll know sooner rather than most pundits in the media seem to think.  

Now notice that I'm not saying stocks are predicting WHO will win.  For the record, I still think it's Joe Biden's race just looking at the electoral math, but my math can obviously be wrong.  What I've been saying for some period of time is the markets can live with either Mr. Biden or President Trump for the next four years.  Whether the strongest partisans on the side that loses can make that same accommodation will be something we're going to find out in the coming weeks.

One other reason I think stocks are betting on a quick resolution to this thing was how the markets closed the end of the week.  Friday was a big down open followed by weakness most of the day.  But markets rallied into the close, which is the opposite that I'd expect given the weakness we'd seen all week and the uncertainty over the weekend.

We'll see and that's why at the end we'll wait for the ballots to be counted.