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Market Commentary

October 2020 Update

Doesn’t expecting the unexpected make the unexpected expected? – Bob Dylan

With the US election on our doorstep about a month away, I want to share two thoughts on elections vis a vis markets:

First, there is no evidence to suggest that one political party is ever better than another for market performance in the USA (nor Canada). We’ve seen bull and bear markets under Republicans and Democrats, and there is no statistically significant edge to either’s historic spending, deficit management, tax policies, et cetera. That said, there is some small edge evidenced at the sector and businesses level, where legislative changes can create more direct effects. Rest assured we are watching developments in this respect.

Second, option and derivatives pricing illustrate that stock market hedgers are expecting an increase in volatility around the election date of November 4. Most interestingly, over the last week I’ve watched that hedging activity extend past the election date, now into latter November and early December. This tells me that hedgers are not only expecting a contentious election day, but also preparing for a possibly contested election result. Perhaps some of this hedging is also an echo-effect from the 2016 election and even Brexit, as hedgers don’t want to risk a repeat of being caught on the back foot by political events. It is not uncommon to see generals fighting the last battle, after all.

The important thing to remember about hedging is that markets are a discounting mechanism. That is to say, if markets adequately discount or “price in” any particular event ahead of time, then once that event comes to pass it often bears little realized effect on prices. Volatility is caused by surprise events, not prepared-for events.

Since election volatility is already priced in, in my opinion a contested election should now have little sway on stocks. Instead, I think the real surprise would not be a contested election, but an election that features a clear and decisive victory. Since markets are not prepared for a decisively won election, then if one arrives, the volatility hedges currently in place would presumably be unwound quickly. This could form a catalyst for a strong post-election move higher in stocks.

Our models currently favour an optimistic view, as, beyond politics, there are longer term positive forces at work for our individual stock and bond holdings.

Financial Planning
September is usually when we start to book winter travel plans. In light of current travel restrictions, some thoughts on this upcoming season: First off, snowbirds should consult their accountants about rental income and/or tax opportunities in respect to winter residences south of the border. Second, switching travel-points credit cards to cash-back credit cards might make sense if you’re not expecting to travel soon. Third, if you are considering travel, some insurance companies are beginning to issue travel insurance covering covid, but please ensure you read the fine print. Our insurance team can help you review critical illness plans, and short term or long term disability plans for more comprehensive coverage. Please be in touch.

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Ben W. Kizemchuk
Portfolio Manager & Investment Advisor
Wellington-Altus Private Wealth

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