Weathering the Storm — How to Navigate the Current Volatility

Weathering the Storm — How to Navigate the Current Volatility

The presidential election campaigns have been caught up in claims and counter-claims about Trump’s handling of the COVID pandemic, what Biden might have done differently, the economic depression and high unemployment, riots in American cities, the Supreme Court nomination, and many other headline-grabbing issues.

These all have some importance and are the types of issues Americans like to weigh up in the consideration of which candidate to vote for. But they’re not always the kinds of issues which are of most immediate concern to investors. The pandemic is a big deal, but most of the market impact has already been priced in.

The pandemic may be with us longer than many analysts thought at first, but it will fade eventually, and life will go on. The Supreme Court nomination is also momentous, but the impact of a particular justice plays out over 30 or 40 years, not all at once. Amy Coney Barrett will still be on the court long after many of today’s investors are long into their secure retirement years.

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Let’s talk about tax

That said, there are some differences between the candidates that have far more direct impact on investors and are getting far less attention. At the top of that list is the difference between how Trump and Biden would tax Americans’ capital gains on sales of stocks, bonds, and certain other assets.

Right now, capital gains are taxed at 0%, 15%, or 20% depending on how much overall income you have. Let’s assume that 20% is the rate that applies for the sake of discussion. Joe Biden’s campaign proposes to almost double this tax to 39.6%. If Biden wins, the earliest that new higher rate could come into effect is 1 January 2021 (even if the law is passed later, it’s easy to make it retroactive to 1 January).

The time to act is right now

Politicians who plan to raise taxes often assume investors will just sit there and let it happen. That’s not true. As described in this article, investors can see changes coming and react to protect their own positions. They could wait until election night and, if Biden wins, sell their stocks the next day to get the lower rate.

The problem is that everyone else will be doing the same thing and a full-scale market crash will be underway. Some investors will anticipate this and sell their stocks in October to beat the crash. That’s fine, but you can do even better and start to lighten up on your stock positions (especially the big winners) right now.

We’re not in the business of giving tax advice. It’s up to you to get advice and plan accordingly. But I can sense a market rout coming based on the reaction to news of a Biden win. The best approach is to get out ahead of that starting now.

Is the recovery already running out of steam?
Initial signs are not good…

In the depths of the pandemic panic and new economic depression in March and April, I recall the happy talk that was coming from the White House and Wall Street. In effect, economic and political leaders said, ‘Yes, things are bad right now, but don’t worry. We’ll have lots of pent-up demand and we’ll have a nice V-shaped recovery. By September, things will be back to normal and the economy will be doing great.’

That turned out to be completely false. Here we are in late October and the pandemic is still with us. Many business lockdowns are happening again after a brief reopening phase in August. Initial claims for unemployment are rising again after dropping in the late American summer. Yes, there is growth, but not nearly enough to pull us out of the deep economic hole we fell into last spring.

Pent-up demand was always a myth. If you skipped 10 dinners at a restaurant during the lockdown, you weren’t going to order 10 meals the next time you went out for dinner. You would have just one.

The recovery is real, but it’s not V-shaped

It’s more of an ‘L’ with a weak recovery after a severe drop. That much is clear from the data. Yet, are things even worse than that? According to this article, the answer is ‘yes’.

The evidence is that the recovery is not V-shaped or even L-shaped. It’s more of a ‘W’ (which means down-up-down-up). We seem to be hitting a second down stage and it may last longer than the down stage of March and April. The author refers to this as a ‘global slowdown during the economy’s all-important rebound quarter’.

This may explain why the historic stock market rebound that began on 23 March and took the S&P 500 and NASDAQ 100 to new all-time highs stalled out on 2 September and has been struggling ever since.

Weathering the storm

The US election adds a new element of volatility to this already volatile mix. Investors should reduce equity exposures, increase their cash allocations, and make sure they have at least 10% gold bullion (or at least gold mining shares) in their portfolios. That will enable you to weather the storm at least until we get more visibility in the economic and political landscape in December.

You can hear more of my thoughts on the upcoming US election over at the Daily Reckoning Australia YouTube channel here.

All the best,

Jim Rickards Signature

Jim Rickards,
Strategist, The Daily Reckoning Australia

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