(Please enjoy this updated version of my weekly commentary written Tuesday November 3rd for the Reitmeister Total Return newsletter. I have added in additional comments in parenthesis throughout to take into account the market reaction Wednesday as America sat transfixed to every additional bit of news on the Presidential election).
Stocks have enjoyed a fairly impressive 2 day rally coming into the election (Plus Wednesday being in the plus column for S&P and tech…while small caps had a lackluster session). There is solid logic in that move given historical precedent. Unfortunately there is 1 MAJOR flaw in the logic which might prove to be a very bad idea with stocks heading lower as a result.
We will shine a light on this major flaw and how it effects our trading plans going forward.
Monday’s RTR Members Only webinar was one of the more timely and vital commentaries to help you navigate this crazy election season. We reviewed key topics like how our trading strategy would change if…
* Delayed Election from waiting to count all the write in ballots
* Contested Election if either side challenges the veracity of the vote adding a lot of time and uncertainty to the process. Not to mention the likely protests around the country that could possibly devolve into riots. (This is becoming a more and more likely outcome given how close many of the swing states are. Trump has already petitioned for recounts. No doubt there will be more to come).
* Trump Wins
* Biden Wins
Beyond that we also had an in depth review of all the current positions in the portfolio. And which would likely stay in the portfolio after the election. And which will be kicked to the curb.
After that we took on more than a dozen questions from fellow RTR members exploring even more timely topics. This is the webinar commentary that you don’t want to miss. So click below to watch it now.
Investors seem to be aware of the typical Presidential election pattern for the stock market. And that is to falter into the election and then rally afterwards.
In this case the market has been rallying for 2 days coming into the election (and the day after the election). That is the way the market should work as some investors want to get a jump on the typical post-election bounce.
However, the logic behind this rally has 1 serious flaw!
Meaning it is potentially foolhardy to believe this election will be resolved in typical fashion later tonight or early Wednesday morning. (How true this statement is appearing to be now on Wednesday evening). I suspect you already know why that outcome is in doubt. And that is because of the unprecedented number of write in ballots this year which will take quite a bit of time to count.
The time it takes to count them is only part of the battle. The real issue comes if and when either side starts to question the veracity of the count and demanding a recount thus adding great uncertainty to when the election will truly be finalized.
If the above scenario happens (which it is) then you can certainly expect protests, and potentially riots, to erupt around the country. Check your favorite news outlet for a host of stories about cities across the country preparing for this civil unrest.
Heck, I am driving out to pick up my daughter Sarah this afternoon to bring her home from college for a few days. Why? Because the protesters have already started up in Evanston, Illinois which is the home of her college, Northwestern University.
She already sees the tension on campus and knows it is a powder keg set to erupt at the slightest provocation. So she wants to come home just to be safe.
So let’s review the risk and reward investment picture as it stands now.
Right now I believe the odds of a delayed election is 95%+. (Make that 100% now)
And the odds of a contested election is about 50% likely in my book for which Goldman Sachs has predicted could easily chop 10% from the market if it gets truly ugly. (We are also moving towards 100% likely in this camp as well given the many statement already made by the Trump camp. The Biden camp is certainly “lawyered up” as well.)
When you weigh out that downside potential versus the 2-3% gain by joining the rally early and being right..that is still a bet that I would rather take to the downside. That is why we continue to be defensive in our portfolio even as this seemingly robust rally unfolds. Because given the odds for post-election ugliness, then we are better off sitting on our hands til this election is finalized. And yes, finalized means that the loser concedes to the winner.
Unfortunately, that is a scenario that could be weeks or even months away. Yet given the risk/reward scenarios noted above, and given the fact that stocks usually tumble 2-3X faster than it rises, then there is more risk in getting too bullish too early.
Now let’s step back from the ugliness of the election to review the impressive roll call of economic events this past week. As you will see the general direction of things is for the economy to be healing at a pretty decent clip. This is why we are more than happy to get back to 100% long once this election is finally put to bed.
The +33.1% GDP growth for Q3 announced last week is not as spectacular as it sounds because it is calculated quarter over quarter. So yes, anything compared to the horrific Q2 result looks pretty darn impressive.
Net-net GPD is still -3.5% below the year ago level. That is a more accurate statement about the absolute/true level of where the economy stands now. But as we find out in the investing world the direction of the economy is more important than absolute level. So the fact that it is improving, and improving faster than expected, is the key part of the story investors will focus on.
The employment numbers also continue to head in the right direction. Weekly Jobless Claims came in last week at 751K which is the second straight report under 800K. And even better we saw another 700K being removed from Continuing Claims which is a sign that they got new jobs and no longer need unemployment payments.
ISM Manufacturing on Monday was very impressive indeed. It jumped up to 59.3 up from 55.4 last month. Even more positive is the shockingly good 67.9 read for New Orders. So there are no signs of this vital sector losing steam.
As for the consumer there was two reports of note showing solid gains. First was Consumer Sentiment from last Friday rolling higher than the past announcement. That includes the important forward looking Expectations component.
Even better was the +3.2% year over year gain for Redbook Weekly Retail Sales report. This is the seventh straight week showing year over year gains. And is the second best weekly showing for this report since the Coronavirus came to town. The trend is most certainly our friend when it comes to overall consumer trends. .
To sum up, our long term view is cautiously bullish as ultra low interest rates makes stocks the much better value proposition for investors. Secondly, the economy is improving at even a faster pace than expected. This is why stocks should be on the ascent in 2021.
Before that comes true we need to first get over the hurdle poised by this election with an uncertain outcome and uncertain path to the finish line. So we will stay defensive until we can put this election to rest and then get ready to rally.
What To Do Next?
Right now my Reitmeister Total Return portfolio has correctly been positioned for stocks to come off the September highs and head lower into the election. This has led to a more conservative portfolio mix that has nicely outperformed the past couple months.
Here is a breakdown of the 11 positions currently in the portfolio:
5 GAARP Stocks (Growth At A Reasonable Price) that are well positioned for the coronavirus economy.
3 Inverse ETFs to mop up gains as the market is heads lower into the election
2 Precious Metals positions because when every world government is throwing money out of a helicopter it creates a bullish environment for gold and other precious metals.
1 Stock Sector ETF of a group likely to outperform. This was added on Wednesday October 21st and already breaking higher.
If you would like to see the current portfolio of 11 stocks and ETFs, and be alerted of when it is time to get 100% bullish once again, then consider clicking the link below.
Wishing you a world of investment success!
…but everyone calls me Reity (pronounced “Righty”)
CEO, Stock News Network and Editor, Reitmeister Total Return
SPY shares rose $0.10 (+0.03%) in after-hours trading Wednesday. Year-to-date, SPY has gained 8.27%, versus a % rise in the benchmark S&P 500 index during the same period.
About the Author: Steve Reitmeister
Steve is better known to the StockNews audience as “Reity”. Not only is he the CEO of the firm, but he also shares his 40 years of investment experience in the Reitmeister Total Return portfolio. Learn more about Reity’s background, along with links to his most recent articles and stock picks. More...
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