Q3 2020 Market Commentary: The Only Thing We Have to Fear Is Fear Itself


October 13, 2020

Written by Nathan Erickson, CFA®, CAIA, Managing Partner and Chief Investment Officer

To view and download a PDF of this commentary, click here.

The title of this commentary comes from Franklin D. Roosevelt’s first inaugural address after winning the 1932 presidential election. At the time, the United States was facing many challenges, not the least of which was the Great Depression. President Roosevelt acknowledged the many challenges, but he sought to encourage the people in light of the resilience of the United States:

“This is preeminently the time to speak truth, the whole truth, frankly and boldly. Nor need we shrink from honestly facing conditions in our country today. This great nation will endure as it has endured, will revive, and will prosper. So first of all, let me assert my firm belief that the only thing we have to fear is fear itself – nameless, unreasoning, unjustified terror which paralyzes needed efforts to convert retreat into advance.”

That moment in time was characterized by a rapidly declining stock market, higher taxes, depleted government income, little-to-no trade, shuttered industrial factories, no demand for farmed goods, and high unemployment. Yet the quote from President Roosevelt could easily be applied today. Our country faces a host of challenges: a global pandemic, civil unrest, high unemployment, a weakened economy, growing national debt, and a deep level of uncertainty as to what the future holds. This is not the first time the United States has faced a host of challenges, and it won’t be the last.

Despite these challenges, equity markets (particularly the U.S. large cap market) have remained relatively stable. The substantial fiscal and monetary support from the U.S. government and federal reserve bank, respectively, has contributed to that stability and may continue to do so in the near term. However, we believe most investors view the 2020 presidential election as the greatest near-term risk to markets. Historically, that simply has not been the case.

This will be the 59th presidential election in our nation’s history. We have reliable stock market data starting in 1925, which gives us 23 elections to evaluate amidst 95 years of data. As it relates to the election itself, historically there has been no meaningful difference in performance in the months surrounding an election in an election year (October, November, December) vs. those same months any other year:


While returns were not meaningfully different, one might assume that volatility would increase around a presidential election. In fact, our research shows that the six months surrounding an election (September through February) have had slightly less volatility (4.62%) than all other months (5.48%). Furthermore, on average, returns following an election have not been materially different from similar period returns at any other time:

The fact is a presidential election in and of itself is not a predictor of stock market returns or stock market volatility. An impending election next month is not a reason an investor should make changes to his or her portfolio. The data doesn’t support it.

That being said, we acknowledge the material differences in the two candidates, particularly as it relates to economic policy. Should Vice President Biden win the election, it is reasonable to assume higher taxes, particularly on corporations and high earners. A democratic White House may also lead to higher regulation and broadening social programs, all of which may have negative impacts on the economy. On the other hand, a re-election of President Trump will likely result in additional tax cuts, increased budget deficits, and reduced global trade, which may lead to higher inflation. Neither the President nor his party is a great predictor of outcomes, despite our best attempts to forecast the market’s reaction to fiscal and economic policy. Over the long term, the market is generally indifferent to which political party is in the White House:

One reason the President’s political party is not a driver is because the White House can enact little legislation on its own. Major policy changes require support from Congress. Getting the House, Senate, and White House to agree on policy was a design of our forefathers to ensure that only the best ideas were ratified. Even though we as investors may be concerned with a Biden White House and the potential tax increases it may bring, such a policy change will have to go through Congressional approval which likely wouldn’t happen until late 2021. This is something we can plan for post-election, but a possible outcome shouldn’t be a driver of portfolio decisions today.

We need to acknowledge the other economic factors that may lead to a bear market. At this point, COVID-19 cases are rising, the economy remains constrained in many areas, unemployment is high, and the stock market continues to rise despite all of it. One or several of these factors may lead to a market downturn. We wouldn’t count the election as a potential catalyst, but simply a coincidental event.

This is a challenging time in our nation’s history; however, it is not the first time the United States faces adversity on many fronts, and it won’t be the last. There is fear about the divisions in America, but we endured the most divisive time in history, the Civil War. There is fear about who will lead our country over the next four years, but America has endured through both weak and strong leaders. There is fear about the state of our economy, but America recovered from both the Great Depression in the 1930s and the Great Recession in 2008-2009. We agree with President Roosevelt:

This great nation will endure as it has endured, will revive, and will prosper.”

We encourage our clients not to be afraid of the short-term risks, but to remember that we have built portfolios to endure through challenges and deliver on long-term objectives. Even if we do endure some challenging markets, they happen far less often and for far shorter periods of time than strong markets.

While we don’t believe portfolio decisions should be made out of fear, now is a good time to discuss your asset allocation because markets are in a good position. Take the time this quarter to discuss with your engagement team your overall risk tolerance, liquidity needs, and any questions you might have about how the portfolio is positioned. Reevaluating portfolio positioning in a good moment builds peace of mind to endure during the challenging times, regardless of the events that cause them.

Written By

Mark Feldman

Nathan Erickson

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