By Mike Gitlin, Rob Lovelace, Darrell Spence, Capital Group

Key takeaways

  • Investor patience is a virtue in volatile U.S. presidential election years.

  • International stocks appear attractive on a company-by-company basis.

  • Consider upgrading bond portfolios as rates stay lower for longer.

Heading into 2020, there is little doubt that politics will dominate the news cycle. For investors, U.S. presidential elections often bring heightened market volatility, especially during the rough-and-tumble primary season. Add that to the U.S.-China trade war, the U.K.’s Brexit drama, slowing global economic growth, civil unrest in Hong Kong, impeachment proceedings in Washington D.C., and you’ve got a classic “wall of worry” for markets to climb.

On the surface, the 2020 presidential election would appear to be a highly consequential event with major implications for the U.S. economy and markets, not to mention the rest of the world. However, history suggests that may not be the case. U.S. markets have consistently trended upward after presidential elections, rewarding patient investors — regardless of who occupies the White House.

“Presidents get far too much credit, and far too much blame, for the health of the U.S. economy and the state of the financial markets,” says Capital Group economist Darrell Spence. “There are many other variables that determine economic growth and market returns and, frankly, presidents have very little influence over them.”

“As we move into the new year, I think we will start to see some improvement in U.S. economic growth, helped along by easy monetary policy,” Spence continues. “But I don’t think the winner of the next election, whether it’s a Democrat or a Republican, will have much of an impact beyond the usual short-term market gyrations.”

International outlook: Consider a borderless approach

Investors who are worried about political risk in the U.S. might want to look overseas for a broader set of investment opportunities. Not because international stocks have any less political risk, but because the world has changed dramatically under the influence of free trade, global supply chains and the rapid growth of multinational corporations.

From an investment perspective, national borders are no longer as relevant as they used to be. Many companies headquartered in Europe, for instance, derive much of their revenue from the U.S., China or Latin America.

“Where a company gets its mail is not a good proxy anymore for where it does business,” explains Rob Lovelace, a Capital Group portfolio manager.

Moreover, many of the best stocks each year are found outside the United States. If you look at individual companies instead of index returns you’ll find that the companies with the highest annual returns each year were overwhelmingly located outside the U.S. In 2019, 44 of the top 50 stocks were based on foreign soil. Investors who opted not to go outside the U.S. missed a shot at those companies, many of which are small to mid-sized firms with potentially faster growth opportunities.

Fixed income outlook: Think about upgrading your bond portfolio

Over the past year, the bond market has reminded investors that not all is well with the global economy. Central banks around the world have cut interest rates aggressively in a bid to offset the negative effects of U.S.-China trade tensions, persistent deflationary pressures and slowing growth in China, Europe and elsewhere.

In the U.S., an inverted yield curve has suggested that a recession may be looming. In Europe and Japan, negative interest rates have spread like wildfire — with more than $15 trillion of bonds trading at negative yields.

In such uncharted waters, investors would do well to upgrade their bond portfolios as a counterbalance against periods of equity market volatility, says Mike Gitlin, head of fixed income at Capital Group.

“In an extraordinary market like this, balance is essential,” Gitlin stresses. “Amid unusual market trends and mixed economic indicators, a strong core bond allocation may be your best defense.”

2020 Outlook: Key takeaways

Stay balanced in an election year

  • Patient investors can do well in election years. We looked at every election since 1932 and found that primary seasons are volatile, but markets have notched solid gains afterward.

  • Recession in 2020? Not if the consumer stays this strong. In the U.S., consumer strength should continue to offset a manufacturing slowdown caused by trade uncertainty.

Consider upgrading your equity portfolio

  • The best offense is a good defense. It’s not too soon to prepare portfolios for rougher seas as we face headwinds from an election year and a slowing global economy.

  • Look for sustainable dividends, not just “value” stocks. The value label can be misleading; it’s not always defensive. Consider selecting companies with the potential to maintain dividend payments in tough times.

Think about upgrading your bond portfolio, too

  • Consider revisiting your bond allocation. Given the late-cycle U.S. economy and weakness abroad, we think a fixed income allocation should be mostly core bonds that can help mitigate stock market volatility.

  • Explore complementary assets to high-yield corporates. High-income munis and emerging markets bonds have offered similar after-tax income potential — often with lower correlation to equities.


About LRPC’s Monday Morning Minute

Lawton Retirement Plan Consultants, LLC (LRPC) Monday Morning Minute is crafted to provide decision-makers with important information about the economy, investments and corporate retirement plans in a format that allows a reader to consume the information in less than 60 seconds. As an independent, objective investment adviser, LRPC has access to many sources of research and shares the best and most relevant information with its readers each week.

About Lawton Retirement Plan Consultants, LLC

Lawton Retirement Plan Consultants, LLC (LRPC) is a Milwaukee, Wisconsin-based independent, objective Registered Investment Adviser (RIA) providing investment advisory, fiduciary compliance, employee education, provider management and plan design services to employer retirement plan sponsors. The firm specializes in Socially Responsible Investment (SRI) strategies for retirement plans and is a pioneer in the field. LRPC currently has contracts in place to provide consulting services on nearly a half billion dollars in plan assets. For more information, please contact Robert C. Lawton at (414) 828-4015 or bob@lawtonrpc.com or visit the firm’s website at https://www.lawtonrpc.com. Lawton Retirement Plan Consultants, LLC is a Wisconsin Registered Investment Adviser.

Important Disclosures

This information was developed as a general guide to educate plan sponsors and is not intended as authoritative guidance, tax, legal or investment advice. Each plan has unique requirements and you should consult your attorney or tax adviser for guidance on your specific situation. In no way does Lawton Retirement Plan Consultants, LLC assure that, by using the information provided, a plan sponsor will be in compliance with ERISA regulations. Investors should carefully consider investment objectives, risks, charges, and expenses. The statements in this publication are the opinions and beliefs of the commentator expressed when the commentary was made and are not intended to represent that person’s opinions and beliefs at any other time. The commentary does not necessarily reflect the opinion of Lawton Retirement Plan Consultants, LLC and should not be construed as recommendations or investment advice. Lawton Retirement Plan Consultants, LLC offers no tax, legal or accounting advice and any advice contained herein is not specific to any individual, entity or retirement plan, but rather general in nature and, therefore, should not be relied upon for specific investment situations. Lawton Retirement Plan Consultants, LLC is a Wisconsin Registered Investment Adviser and accepts clients outside of Wisconsin based upon applicable state registration regulations and the “de minimus” exception.