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“October Surprise”? A scenario the markets don't seem to be ready for

October 04, 2020
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So what’s so scary about Halloween?  Or October for the stock markets?  Black Monday in October, 1929?  Black Monday in October, 1987?  What were those about again?

We were meeting last week with a relatively new client, in her seventies, very bright and fully informed of both the markets and current events.  As we reviewed her accounts and holdings, her most pressing question for us was, “the Apple and Amazon shares I own an e-Trade account I run on my own have been doing really well… do you think I should buy some more?”  Notwithstanding that individual stock picking is entirely opposite our planning approach and diversification principles, the question itself, coming from a client in her particular circumstance, did provide quite a “whack on the side of the head” moment of 2 simultaneous realizations for us.

LONG AGO AND FAR AWAY… IT WAS MARCH

First, how far and how rapidly we have come from the steepest decline – down 34% for the S&P500 Index in just 33 days1 – of all time to a summer and fall of soaring and rapidly jumping stock prices, all while we have all been living under the cloud of Covid-19 and all of its necessary but nagging restictions.  As I write this on Columbus Day, the NASDAQ Index – the home of those Apple and Amazon and Google and Tesla market favorites of many an e-Trader – has now gained 33% this year-to-date.  Not since the start of the recovery, back on March 23rd, after that steepest-ever decline (no, that would be an even more breath-taking 74% gain).  Heck, just since a couple of Thursday’s ago, the index has gained about what it’s averaged for a year (up 12% since 9/24)2.

IN A COUPLE/THREE MORE THURDAYS… THERE’S AN EVENT COMING UP!

Second, that despite wall-to-wall 24/7 Election coverage (or perhaps DUE to it?), the markets – and the investors that comprise them – don’t seem to be recognizing or factoring in what has, in recent days, become a very real scenario.

Disclaimer: what I describe here is not a political appeal or point of view; rather, it is purely an assessment of where events could plausibly lead and thereby cause uncertainty – and resulting risk for investors – on a larger scale than it would seem most realize.  Namely, that the Democrat ticket of Biden-Harris, along with other party leaders including Senate Minority Leader Chuck Schumer, have, on multiple occasions recently, suggested that they would 1) eliminate the filibuster rule in the Senate (requiring 60 votes to pass most measures), which dates to 18373, which would enable them to 2) add 2 states – Puerto Rico and the District of Columbia, presumed to provide Democrats with 4 additional reliable seats in the Senate, so they could 3) “pack” the Supreme Court by simply adding enough additional seats to the 9 that have been established since 1869 and then, by simple majority vote, name Liberal justices to all of the new seats to create a Liberal majority on the court.  Oh… and they are considering elimination of the Electoral College for Presidential elections as well, which would put a heavy weighting on the outcome from just the biggest 5 states or so.

OK… a bit of a Civics course review there, but the point is: with a Democrat President and a Democrat majority in the Senate, these actions, each of which would part significantly from very long-standing “checks and balances” standards for our Federal government, are not far-fetched, but actually are intentions the Democrat leadership has indicated.

As noted, I make no political case here for any election outcome.  Importantly, however, this letter is intended to point out that markets do not historically react well to uncertainty and that the election outcome and resulting actions described above do represent a realistic scenario that the market’s rapid gains of recent weeks seem not to be addressing.

As always, our counsel is to at all times consider risk along with returns for invested assets and how they are best positioned for any and all economic and market outcomes.  If such a “lifeboat drill” makes sense for you in this October, please do contact us to arrange a time for us to huddle.

The best “October Surprise” would, we think you’d agree, be one that we are fully prepared for!  Best to you and your family!

1 “The Tragedy is Complete”, Nick Murray Interactive, September, 2020.

2 Google Finance.

3 History.com.

The S&P 500 Index is a market capitalization-weighted index of 500 widely held common stocks.  Investors cannot invest directly in an index and unmanaged index returns do not reflect any fees, expenses or sales charges.
The views and opinion expressed here are of Jeff Watson and do not reflect the views and opinions of Avantax Wealth ManagementSM and it subsidiaries. These opinions are based on observations and research and are not intended to predict or depict performance of any investment. These views are as of the close of business on October 12, 2020 and are subject to change based on subsequent developments. Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed. These views should not be construed as a recommendation to buy or sell any securities. Past performance does not guarantee future results.