I am sure there are many questions on your mind right now. Is the stock market overvalued? What is driving the stock market? Are we going to get another stimulus plan? And what’s going to happen once the November 3rd Election is over? Hey, it’s Dean Barber, CEO of Modern Wealth Management. I’m going to address all of those questions on this month’s economic update.
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September Stock Market Performance
They call it the September swoon because September ended a little bit better than it started. Most major indices are well off the highs of the end of August.
Figure 1 | Source: Chaikin Analytics
Let’s take a quick look to review what the stock markets have done in September in Figure 1. We had every major index in the negative territory—the worst-performing index, the NASDAQ, and negative almost 8%. The best performing is the equal weight S&P 500 index and kind of in the middle of the road was the Russell 1000. The S&P 500 was down 5.74%. So, we had negativity across the board, even the Dow Jones Industrial Average down 4.31%.
Stock Market Performance Last Three & Six Months
Figure 2 | Source: Chaikin Analytics
But if I switch that over to a three-month performance in Figure 2, what do we see? The NASDAQ, who was the worst performer for the month, is actually up the most over the last three months at 7.54% for the quarter, which is a great quarter, no question about it. If you take a look at the six months, we’re up 37.38%. Now, of course, that’s to be expected because we’re coming off the March lows.
Stock Market Year-to-Date
Figure 3 | Source: Chaikin Analytics
Let’s look year-to-date in Figure 3. It’s pretty fascinating. I mentioned the disparity in returns and where those returns are coming from in the last few economic updates. So, if you look at year-to-date, you’ve got one outlier here, and that’s the NASDAQ composite. It’s up almost 30% for the year, even after losing 8% in September. Then we see the S&P 100, the Russell 1000, and the S&P 500, up 3.27% year to date. However, if we look farther down, you can see SmallCap and MidCap down 16% and 10%. When you look at the stock market, there is this disparity, and I want to show you why.
Stock Market Concentration
Figure 4 | Source: Goldman Sachs
If we look at stock market concentration in Figure 4, which comes from Goldman Sachs, you’ll see the stock market capitalization on the top five stocks. It’s also showing the past recessions, and it also shows the past bear markets in the gray areas. So, let’s go back to 1999, the top five stocks in the S&P 500 made up 18% of the total S&P 500. Today, the top five stocks make up 24% of the weight of the S&P 500. So, the value of the top five stocks is 24% of the S&P 500. That is a huge deal.
Top 5 Versus the other 495 S&P 500 Holdings
Figure 5 | Source: Goldman Sachs
Figure 5 shows us the performance of those top five stocks versus the other 495 companies. So, I showed you that the S&P 500 was up about 3% year-to-date, that’s the light blue line in the middle. But the top five stocks are actually up 37%, while the other 495 stocks (dark blue line) are down by 4%.
So even though they’re making up a considerable weight of it, that’s why I was having a lot of those top five stocks like Google, Facebook, Amazon, and Tesla. All those stocks have all been on fire. We wrote an article a little over a month ago, asking the question: Is the stock market overvalued?
We went into a ton of detail about the stock market overvaluation. The answer today is still the same. The stock market is still overvalued. However, many of the signals right now make you wonder what’s happened in September? Has the stock market oversold?
More Stimulus?
That brings us to the idea of more stimulus and the election. Secretary Minuchin said this week that he thought that the Congress and the President would work very, very hard to get another stimulus plan in place before the election that sent the stock market on a rally.
How Elections Impact Markets Long-Term
We all saw the most awful debate I’ve ever seen recently. People are asking, “Okay, what’s going to happen? Am I better off with a Biden presidency? Am I better off with a Trump presidency?” I have a couple of charts that I’m going to go over with you, and I want to leave politics entirely out of this. I only want to look at the data and what happens typically under a Republican president versus a Democratic president and explore how it works. If you’ve got a unified House and Senate, or if you’ve got to split Congress.
Figure 6 | Source: State Street Global Advisors
In Figure 6, this particular instance, we’re going to look here at a unified government. That means we’ve got houses, and then we’ve got a Democrat president or Republican president. So, with a unified government, we’re seeing better performance in the stock market of a Republican president.
If we have a split Congress and have a Democrat versus Republican, you can see here that the democrat is better than the republican. So, the stock market, in most cases, doesn’t care who the president is. GDP drives the stock market. 70% of our gross domestic product is consumer-spending. As the consumer goes, so goes the economy.
The Bigger Economic Threat
The more significant threat to our economy and the stock market itself is not the election, its COVID-19. It’s coming up with a vaccine so that people can get back to their everyday lives, and planes can start flying in mass again, and they can fill them, and people get on cruise ships.
If COVID-19 hangs on another three, four, five, or six months without any meaningful progress towards a vaccine, I believe that you see a significant pullback in the stock market. And I think it will be far more significant than whether or not Joe Biden wins or whether Donald Trump wins.
Contested Elections
Figure 7 | Source: State Street Global Advisors
Figure 7 shows what happens in contested elections. We’ve already heard that we may not know who president will be on November 3rd. Maybe not by November 4th, by November 5th, or even by Thanksgiving. There is a lot of politicking going on both sides of the aisle.
I want to take you back to 2000 when we had the contested election in Figure 7. Remember the hanging chads in Florida? Let’s look at what happened. You had the election day on November 7th. Then what happens? We don’t know who’s president. We don’t know how the votes we’re going to be recounted in Florida.
All of a sudden, the Supreme Court made its decision on December 4th. We were over a month past the election before we knew who would be sworn in the next year. The stock market during that period, as you can see, was way down. Then once we knew, the stock market gets a chance to go back up.
In that period, bonds (the orange line) did extremely well. So, if we wind up with a contested election, it may be a good idea to overweight a little bit in bonds for a while until we know what’s going on. The drawdowns in 2000 weren’t horrible, the Russell 2000 lost about 7%, and the S&P 500 lost about 5%.
Stay in Touch with Your Advisor
We expect volatility will continue to be with us for the next couple of months. I think what’s going to tell us the direction of our economy and the stock markets is the progress made on a vaccine for COVID-19.
We’ll keep you informed. As always, we are here watching over your accounts, and we encourage you to call us at (913) 393-1000 with any questions or request a complimentary consultation below.
Dean Barber
Founder & CEO
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