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Thursday afternoon in the US, news broke that a top White House aide, Hope Hicks, fell ill with COVID—leading many commentators we follow to worry the virus would have spread to other officials, including President Donald Trump. At about 10PM on America’s West Coast, tests confirmed it: Both President Trump and First Lady Melania Trump were COVID-positive and quarantining. US overnight equity futures (securities that represent an agreement to buy shares at a set price) immediately dipped—and the S&P 500 fell on Friday overall—which we don’t find surprising as this October surprise stokes uncertainty somewhat.[i] It also fuels a tremendous amount of speculation about what it all means for the election—and, correspondingly, equity markets. The chatter throughout the financial news world escalated on Friday with news that the president was hospitalised and taking an experimental drug to treat the infection. In our view, investors should avoid this vortex of speculation. The impact on the election is entirely unknowable, and we think equities’ dip Friday is likely a short-term sentiment reaction—probably fleeting. Making too much of this is a bias-laden minefield, in our view.
Given that the US election is only a month away, it is perhaps natural that the minute this news hit, political commentators went into overdrive trying to discern the infection’s possible impact. Amongst the most common theories we have seen:
We could go on. There are no doubt countless others, but the point is that they are all contradictory and there is generally no way to assign probabilities to any of these outcomes. Nor is there any realistic way to foresee how bad a bout of COVID he has, despite many commentators attempts to infer the severity from the doctors’ course of treatment. The experimental drug could indicate a relatively high viral load or insufficient immune system response, or it could be purely precautionary. Similarly, there is no way to know how a mild or bad bout of the illness could affect Trump’s policy stance on virus response. We think anyone arguing anything else at this point is guessing. Some commentators will inevitably point to Johnson’s abundant caution following his infection, but that is a sample size of one, and shared hairstyles aside, Boris Johnson isn’t Donald Trump.
Unknown and unknowable factors are no basis for making an investment decision, in our view. That said, many financial commentators seem to operate under the impression that Trump losing the election would be awful for US equities—and bias could have them see Friday’s dip as supporting evidence. In our view, this would be a mistake. We have 94 years of good US equity market data. They have done well—and poorly—under both Democrats and Republicans.[iii] The current administration took office in 2016, seven years into history’s longest bull market (prolonged period of generally rising equity markets).[iv] The S&P 500 was already up 272.2% in US dollars between the bull market’s start and Trump’s 8 November 2016 victory.[v] From then until the coronavirus lockdown walloped the bull market, US shares rose another 69.0%.[vi] The S&P 500 eclipsed pre-financial crisis highs on a total return basis on 2 April 2012—during President Barack Obama’s first term.[vii] It hit many more thereafter and continued to under Trump.[viii] There were multiple bull market corrections (short, sharp, sentiment-driven drops of -10% to -20%) whilst Obama was in office. There were two in 2018, whilst Trump was president. On the economy, US quarterly GDP growth averaged 2.51% annualised (meaning, the annual rate that would result if a given quarter’s growth rate continued for four quarters) in Trump’s 12 pre-COVID quarters in office.[ix] It averaged 2.38% in the preceding 12.[x] To sum up: The change in administrations in 2016 didn’t materially affect equities or economic growth. Whilst we think presidents do have an influence on markets—mostly through legislation and policymaking—it is a mistake to overrate it.
We wish the president and first lady a swift and easy recovery—as we would anyone suffering from COVID. But for investors, we think the lesson in all of this is that speculating on the unknowable in a field rife with bias is not a viable investment strategy. This year has been a test of investors’ poise and patience on many fronts. This October surprise is just the latest.
[i] Source: FactSet as of 2/10/2020.
[ii] Source: YouGov, as of 2/10/2020.
[iii] Source: Global Financial Data, Inc., as of 2/10/2020. Statement based on S&P 500 total returns, 31/12/1925 – 30/9/2020. Presented in US dollars. Currency fluctuations between the dollar and pound may result in higher or lower investment returns.
[v] Source: FactSet, as of 2/10/2020. S&P 500 total return, 9/3/2009 – 8/11/2016. Presented in US dollars. Currency fluctuations between the dollar and pound may result in higher or lower investment returns.
[vi] Ibid. S&P 500 total return, 8/11/2016 – 19/2/2020. Presented in US dollars. Currency fluctuations between the dollar and pound may result in higher or lower investment returns.
[vii] See Note vi.
[viii] See Notes vi and vii.
[ix] Source: US Bureau of Economic Analysis, as of 2/10/2020. Average GDP growth rate, Q1 2017 – Q4 2019.
[x] Ibid. Average GDP growth rate, Q1 2014 – Q4 2016.
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