Should Investors Take Washington Follies Into Account in Investment Decisions?

The markets have proven (again) that volatility has become the new normal and that dramatic changes can occur before and after the opening bell.

That came into sharp focus yesterday. Before market opening, all major American and European indicators were strongly in the green with optimism about a stimulus deal in Washington a large part of the impetus.

During the morning hopes for an agreement faded and it appeared that Congress would continue being unable to agree on a stimulus bill to boost the economy. Much of that green quickly turned to red as the markets headed down, including blue chip tech stocks such as Apple Inc., Microsoft Corp. and

The Dow Jones Industrial Average fell 410.89 points, or 1.44%, to 28,195.42, the S&P 500 lost 56.89 points, or 1.63%, to 3,426.92 and the Nasdaq Composite dropped 192.67 points, or 1.65%, to 11,478.88, according to Reuters.

Yesterday was not for the weak of heart and stomach. As well as the sinking in New York, trading on Euronext markets shut down for three hours due to technical glitches.

The markets today, Tuesday, viewed several hours before the opening bell, appear poised to start again on a positive note with most major indicators in the green at time of writing. Once again, they are being driven by stimulus hopes based on reports that House Speaker Nancy Pelosi and Treasury Secretary Steven Mnuchin appear closer to making a deal and are planning to discuss it again today.

Investors, analysts and observers can be forgiven for feeling that they must take the Washington follies into account in investment decisions, although for some observers stimulus has become inevitable according to an analyst in a Reuters report.  “There’s a decent case that regardless of who wins, if stimulus doesn’t happen before the election, it’ll happen afterward,” says Mona Mahajan, U. S. Investment Strategist at Allianz Global Investments in New York. Mahajan added that the rise in virus cases points up the importance of stimulus.

If Mahajan has it right, (which is likely the case), we can expect that particular quandary to be clarified before November 3 – or perhaps some time afterwards depending on how long it takes to get a final vote and whether there are any disputes.

It is also very much within the realm of possibility that agreement will be reached today, meeting Speaker Pelosi’s deadline.

Longer range, there are other issues to consider including the economic recession wrought by the COVID 19 pandemic.” We are definitely in a recession …” says Drummond Brodeur, Senior Vice President and Global Strategist at Signature Asset Management, a division of CI Investment Funds.

Brodeur suggests that how long we have been in a recession depends on how one defines it but that the ‘recession is still young’.

There are two tectonic forces at work in the recessionary equation: the recalling of laid off workers in which slightly more than half have of them have returned to work counterpointed with temporary layoffs that have become permanent as many businesses have been forced to shut down.

Brodeur says that while we are absolutely in recession currently, he expects improvement as we move through 2021. The pace of improvement depends on factors such as beating COVID 19 and effective policymaking in Washington.

The path of the virus is uncertain with a second wave unfolding in some areas. Brodeur says that the big question is how we learn to live with it and mitigate the risk, with strategies such as testing, tracing and developing treatments to reduce the severity and of course, vaccines.  The effective policymaking part of the equation depends on the inhabitants of Capitol Hill.

In other editions of this column I have suggested the increased importance of the advisor-client relationship and coping strategies for investors concerned about these issues and the volatility they create, and plan to continue offering possibilities for consideration.

Related: The Markets and the Regulatory Picture Under a Biden Presidency