FORECASTS & TRENDS E-LETTER
by Gary D. Halbert
December 1, 2020

IN THIS ISSUE:

1. Ken Fisher: Why Gridlock in Washington is Bullish

2. Stocks May Go Higher, But Still Need Diversification

3. Like Many, We Had to Cancel Our Thanksgiving Plans

Ken Fisher: Why Gridlock in Washington is Bullish

Today I’m reprinting an interesting editorial published last Friday by Ken Fisher, the CEO of Fisher Investments, one of the largest investment advisory firms in the world, founded by Fisher in 1979. Fisher is the author of 11 books on investing, including several New York Times bestsellers and wrote a financial column for Forbes magazine for over 32 years.

Fisher believes we are in for political gridlock in Washington over the next several years when little or no major legislation will pass – regardless who controls the Congress. This gridlock, Fisher argues, will be very bullish for stocks. And he presents some very interesting facts, figures and statistics to support his view on the market. [Bold emphasis is mine.]

“NO MATTER HOW GEORGIA GOES, GOLDEN
GRIDLOCK IS HERE [AND BULLISH] FOR STOCKS

Following America's election, you may be blissful over Biden’s win or terrified by Trump’s (apparent) defeat. But cold, emotionless stocks view this election differently. The absence of a blue or red wave leaves razor-thin electoral margins rendering big legislative change dead on arrival. However you feel about this-or-that race’s outcome, that’s great stock market news.

In October, I detailed why falling uncertainty boosts stocks after elections. Now clarity comes and stocks are jumping. Since the vote, the S&P 500 is up 7.9%. World stocks are up more, 10.3%. The divided results ushered in a do-little government bringing bullish relief here and abroad.

In the House, Democrats expected to increase control about 15 seats above their 232 pre-November total seats. Instead the Republicans gained at least 10 seats—with three still undecided with Republicans slightly ahead. However they go, this will be the Democrats’ thinnest House majority since at least World War II. If the GOP takes those three, it will be their smallest edge since 1900. Hence, bold legislation is a non-starter.

Ditto in the Senate. If Republicans win at least one of Georgia’s two January 5th runoffs, they retain a slim majority. If not, it’s a 50-50 deadlock with Vice President-elect Kamala Harris casting the tie breaking vote for the very slimmest edge possible. Hence, again, minimal legislation.  The margins are simply too thin. Moderate Democrats and so-called progressives already blame each other for a “Blue Wave” failing to materialize.

To pass anything partisan, both sides need effective 100% uniform support—and there is nothing controversial all members of either party agree on. Any one or two dissenters can kill any issue. Things will only pass with broad agreement.  Moderate Democrat Joe Manchin and Moderate Republican Susan Collins are reportedly talking about joining forces to ensure moderation. Gridlock rules, at least until 2022’s midterms.

Gridlock frustrates voters—who want their views to dominate, creating change. But stocks love it. I’ve studied politics’ influence on markets for decades. One constant: In developed country markets, stocks do best when big legislative risk is low. Why? More clarity for executives and investors to plan. Fewer wild cards to fret.

Legislation redistributes money, property rights, or regulations—creating winners and losers. Behavioralism shows people hate the pain of loss vastly more than loving equal-sized gains. So new legislation’s losers really hate it. Others fear they may be next to suffer. This uncertainty makes returns much less variable when gridlock rules.

Typically, new presidents arrive touting big ideas. That is when they have the most political capital, hoping to get the most done—that’s why so many people talk up actions in the first 100 days. It’s also why President Donald Trump’s 2017 tax cuts came early. Ditto for President Barack Obama’s early 2010 healthcare overhaul.

That doesn’t guarantee stocks struggle—they soared in both Trump’s and Obama’s first years while their parties controlled Congress. But since good data begin in 1925, US stocks have risen in 58% and 63% of presidents’ first and second years, respectively—noticeably behind the overall 73.7% annual frequency of gains. Fear over policy shifts helps explain why.

Then midterms arrive. The president’s party almost always loses relative power in Congress, ushering in gridlock on an absolute or relative basis. Bullish! The result: Stocks have risen in 92% of presidents’ third years and 83% of fourth years. Those years also boast the highest median returns—22.6% for third years and 12.0% for fourth years, both topping US stocks’ long-term average annualized return of 10%. Now? We needn’t wait for midterms for gridlock. We get it perfectly immediately ahead.

This all augments the repeat trend I detailed here in October. When a Democrat wins the presidency, election-year returns are typically tepid before the election, thanks to biases painting the party as anti-business. But in inaugural years, stocks rebound big as investors’ fears don’t come true and relief ensues. (Vice-versa when a Republican wins.)

Investors will feel that benign political backdrop increasingly ahead—helping stocks not only at home but globally. While pundits often highlight differences in US and non-US markets, developed markets typically move together. Non-US developed world stocks have a 0.85 correlation with the S&P 500 over the past 20 years—sky-high considering -1.0 is polar opposite and 1.0 is lockstep movement.

Politics are, of course, merely one factor for stocks. But after a tense election year, the long lasting relief gridlock provides blows a forward wind in stocks’ sails. Take advantage now and own stocks—at home and abroad.” END QUOTE

Conclusions: Stocks May Go Higher, But Still Need Diversification

In summary, I don’t know if Fisher’s bullish outlook for stocks over at least the next few years will prove to be correct, but we are certainly off to a good start since the election. I do believe he is right about gridlock prevailing in Washington and as he points out, gridlock is historically good for stocks.

Of course as we all know, there is a lot which could go wrong in the next few years, what with US and global debt exploding as never before. And I believe a LOT depends on the outcome of those two critical Senate runoffs in Georgia on January 5. If the Democrats take control of the Senate, and thus all three branches of government, then all bets are off, in my opinion.

This uncertainty argues for having a portion of your portfolio in our investment programs which have the ability to go to cash (or short the market in some cases) and in other alternative strategies which do not depend on stocks for positive returns.

At Halbert Wealth Management, we currently recommend over a dozen professionally managed investment strategies which are available to individual investors, along with several other successful programs which are open to “accredited investors” only. If you are an accredited investor, be sure to let us know so we can share these opportunities with you.

As always, we stand ready to assist you with all of your investments and are happy to provide a no cost evaluation of your portfolio. Call us at 800-348-3601.

Like Many, We Had to Cancel Thanksgiving Plans

I hope everyone reading this had a Happy Thanksgiving with family and friends, complete with turkey and dressing and other goodies. Our family Thanksgiving gathering did not go as planned. Our daughter who lives in College Station was diagnosed with COVID-19 on Tuesday of last week. Since she and her husband had visited us the weekend before, that meant Debi and I might have been exposed.

We went to get tested for COVID on Wednesday and fortunately, our tests came back negative. Still, this meant we had to cancel our family get-together at the last moment since we were instructed by the Doctor to quarantine at home for at least 10 days. So, it was just the two of us on Thanksgiving for the first time since we were married almost 35 years ago. I froze the turkey and we’ll give it another try when the kids come home for Christmas.

So as I write this we are quarantined at home. Fortunately, neither one of us contracted the virus or had any symptoms, and today is day #10 since we were possibly exposed. We’re hoping life gets back to normal starting tomorrow. The other good news is our daughter who did contract COVID-19 is doing just fine; she has had no symptoms, feels good and is working from home.

In any event, while we didn’t  get to have our traditional family Thanksgiving in our home this year, we are indeed thankful for all of our clients and readers. Without our clients, this newsletter, which I have written for over 40 years, wouldn’t exist. So, on behalf of all of us at Halbert Wealth Management, we send a heartfelt THANK YOU to all of our loyal clients.

All the best,

Gary D. Halbert

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Forecasts & Trends E-Letter is published by Halbert Wealth Management, Inc., a Registered Investment Adviser under the Investment Advisers Act of 1940. Information contained herein is taken from sources believed to be reliable but cannot be guaranteed as to its accuracy. Opinions and recommendations herein generally reflect the judgement of the named author and may change at any time without written notice. Market opinions contained herein are intended as general observations and are not intended as specific advice. Readers are urged to check with their financial counselors before making any decisions. This does not constitute an offer of sale of any securities. Halbert Wealth Management, Inc., and its affiliated companies, its officers, directors and/or employees may or may not have their own money in markets or programs mentioned herein. Past results are not necessarily indicative of future results. All investments have a risk of loss. Be sure to read all offering materials and disclosures before making a decision to invest. Reprinting for family or friends is allowed with proper credit. However, republishing (written or electronically) in its entirety or through the use of extensive quotes is prohibited without prior written consent.