Thanksgiving Rays of Light for Investors

With most folks’ Thanksgivings lacking the gathers of family and friends this year, it doesn’t seem as if there is much to celebrate—an understatement, considering the sucker punch 2020 has delivered to the entire world. Even the mere exercise of searching for glimpses of positivity to grasp may seem like sacrilege after months of upheaval and tragedy. But maybe that is the best reason to do so now? A way to try and wrest something “normal” from a year that is anything but. So as we tuck into our downsized Thanksgiving meals and video call our long-distance friends and loved ones, here are some things we think investors can be thankful for even in this terrible year.

Stocks recovered from the bear market much faster than most could envision. February and March’s five-week bear market was trying for many investors, but with the benefit of hindsight, it seems to us that its speed was its defining feature—both in how fast it came and went. Stocks regained their prior highs five months later—a record-fast round trip completed before summer’s end. Those who didn’t react may have a new appreciation for staying cool in the midst of panic—when it is generally better to ride out volatility—hard as it may seem.

The speedy round trip from record high to bear market low and back to record high means that, as harrowing as the steep drop was, this bear market had a smaller-than-usual effect on folks who draw cash flow from their portfolios (provided you remained disciplined). Prior to 2020, bear markets averaged a 21-month grind lower.^[i] While even this timeframe isn’t insurmountable, retirees with higher cash flow needs often feel pressure to cut back during downturns (whether they are in stocks or not). That doesn’t seem as necessary this year.

Earnings didn’t decline as much as people feared. As we covered recently in more depth, earnings have far exceeded expectations. With 95% of S&P 500 companies reporting, their Q3 earnings are down only -6.3% y/y.^[ii] At September’s end, analysts expected them to fall -21.1% y/y.^[iii] Behind the positive surprise? Q3 sales are down just -1.3% from last year’s level, highlighting how the earnings beat isn’t primarily from cost cuts.^[iv] Corporate America is showcasing extraordinary resilience in the face of adversity, in our view.

That has enabled corporations to cut dividends far less than expected. In April, when things seemed bleakest, pundits forecast companies cutting dividends more than -20%.^[v] However, with one month to go, 2020 S&P 500 dividends are on track to fall just -1.2% from 2019.^[vi] Plus, many companies that cut or suspended dividends earlier this year are now planning to resume them.^[vii] This speaks to a stock-market reality that isn’t as dire as feared—fuel for a young bull market.

However you feel out about politics, uncertainty is falling. On top of everything else this year, elections added an extra layer of uncertainty. But we know a lot more than a few weeks ago. With more states certifying their results, President-elect Joe Biden’s transition is in full swing, and his cabinet is taking shape. Congress’s exact makeup is pending Georgia’s January 5 Senate runoff elections, but whatever happens, we will have either a narrow Republican majority or a 50/50 split with Vice President-elect Kamala Harris breaking ties.

Regardless of which outcome we get, sweeping change is unlikely. The narrower House margin also fosters gridlock. With 3 races undecided, the Democrats edge is at 222 – 210, down from 232 – 197 in the current Congress.^[viii] No matter how the undetermined races wind up, this is a small margin historically. For stocks, increased political clarity—and unusual early-term gridlock suggesting big change isn’t afoot—is a plus entering the new year.

While 2020 has been among the worst of times, immense challenges have also brought out the best in people. The COVID response no doubt has major fallout. But humans are infinitely creative and adaptable. Remote schooling and work aren’t perfect, but practice has improved them overall and they demonstrate people’s and businesses’ flexibility. Companies’ supply-chain adaptations have fundamentally upgraded America’s infrastructure and capacity to deliver goods and services. It wasn’t so long ago that people thought food shortages were coming. That hasn’t happened on any broad scale.

Of course, there are also innovations in vaccine development. What used to take years and years seems to have taken months. There are now at least three effective vaccines pending safety approvals. More may come. Distribution hurdles remain, but we think creative businesses will prove capable of surmounting them.

On a more personal level, the IRS is giving you a tax break for charitable contributions this year. The CARES Act lets you make a tax-deductible $300 cash contribution to 501(c)(3) public charities without itemizing. That means if you take a standard deduction when you file your 2020 tax return, you can also deduct $300 from your adjusted gross income for a bit of a tax break. This may not sound like a huge deal, and it may present only a modest plus for those able to act financially. But for charities—and the people they help—it could make a big difference.

Also, courtesy of the CARES Act, you don’t have to take this year’s required minimum distribution (RMD). This lets you keep more of your savings invested and lowers your taxable income. You can still take distributions if you choose or need to, of course—and donating these tax-free to eligible charities up to $100,000 is still an option. But you aren’t legally required to.

The next few months will likely hold yet more challenges. But we think it is critical to recognize the positive things people are doing both in spite of—and in response to—the crisis. This Thanksgiving we are thankful for the sacrifices of those on the front line, those working to develop vaccines and those just working hard to keep an ounce of normalcy in all our lives. In our view, those are things we all can be thankful for—above and beyond the rays of light investors can find. Happy Thanksgiving, this year more than ever.