MIKE TOWNSEND: Just think of everything that investors are trying to process right now.
The coronavirus continues its relentless march, with the death toll in the United States approaching the grim total of 200,000.
Progress toward a vaccine sometimes feels like two steps forward, one step back.
The economic data remains poor. Unemployment is above 8 percent, consumer confidence is down, and the federal deficit—as a percentage of GDP—is the largest since World War II.
The nation remains deeply polarized over a variety of social issues. And all of it will come to a head in less than seven weeks with one of the most anticipated elections in modern history.
And yet the markets are at or above their peaks from before the pandemic began.
Many investors just don’t feel confident—and that leads to anxiety, poor decisions, and frustration.
Welcome to WashingtonWise Investor, an original podcast from Charles Schwab. I’m your host, Mike Townsend, and on this show, our goal is to cut through the noise and the nonsense of the nation’s capital and help investors figure out what’s really worth paying attention to.
In just a couple of minutes, we’re going to discuss what it’s like to be an investor right now, when so much in the world seems to be going wrong, but the market seems to be going so right. I’ll be joined by Brad Bartick, Schwab vice president and branch manager of our downtown Denver branch. He meets with clients all the time and hears directly what their most troubling concerns are.
But first, a quick look at some of the other stories making news right now.
At the top of the list is something that is more notable for what’s not happening than for what is happening. Despite months of widely held assumptions that Congress would pass another major coronavirus aid and economic stimulus bill before the fall, that now seems highly unlikely to happen.
At the outset of the coronavirus pandemic, back in March and April, Congress acted quickly and in a surprisingly bipartisan manner, passing four major aid bills, totaling about $2.8 trillion, in a span of about six weeks. But the last of those bills was signed into law in late April—and since then, Congress has been unable to agree to any more aid.
Democrats, who control the House of Representatives, approved the $3.4 trillion HEROES Act back in May. But unlike the previous four aid bills, that proposal was not negotiated in a bipartisan manner, and just one Republican voted for it.
It wasn’t until July that Senate Republicans responded with a plan of their own—a much narrower bill called the HEALS Act that totaled about $1 trillion in aid. It never even made it to the floor of the Senate for a vote—mostly because it didn’t even have the support of all the Republicans in the Senate.
What has unfolded since then is a whole lot of nothing. There have been some sporadic conversations between Democratic leaders and the White House. There’s been a lot of back-and-forth in the press. There was an attempt last week by Republicans to pass a so-called “skinny” aid bill that would have provided about $500 billion in relief money—but that was blocked by Democrats on a procedural vote. Unless there is a dramatic breakthrough in the next week or two, it looks increasingly likely that any further aid package will have to wait until after the election.
Why is this happening? The gulf between the two parties is wide. House Speaker Nancy Pelosi said late last month that Democrats would be willing to support a bill of about $2.2 trillion—but that’s still a long way from the $1 trillion that represents the best offer thus far from Senate Republicans.
And the differences in priorities remain huge as well. The top priority for Democrats has been aid for state and local governments—the House-passed HEROES Act includes almost $900 billion for states and municipalities, but the HEALS Act in the Senate didn’t contain any money for state and local governments at all. A top priority for Republicans is liability protections for businesses—something Democrats are not enthusiastic about. And there are other deep divides—on issues like enhanced unemployment benefits and aid to small businesses.
Part of the challenge for Republican leaders is that there is a group of 20 to 25 Republican Senators who are pretty much dead set against any more aid at all. They feel that the $2.8 trillion that has already been allocated is still working its way through the system, and some of it hasn’t even been put to work yet. And there is some truth to that. For example, the Federal Reserve has a pot of about $600 billion set aside for loans to mid-sized businesses. But as of last week, just $1.2 billion in loans had been made from the program.
Keen listeners to this podcast will recall that I was pretty direct back in July that I did not think Congress could leave town for its August recess without passing another aid package. Well, I was wrong about that—Congress did take its recess without passing a bill.
And then I thought Congress would come back to Washington in September and work to get something done that both parties could tout before the November election. But that doesn’t seem to be happening either.
It’s still possible that a last-minute deal will come together. Earlier this week, a bipartisan group of 50 House members, equally split between Republicans and Democrats, released a compromise proposal. It attempts to split the differences between the two parties, with a $1.5 trillion price tag, $450 a week in enhance unemployment benefits, $500 billion in aid to state and local governments, and more. On paper, it looks pretty good. But it may be too late to jumpstart momentum. As Senate Majority Leader Mitch McConnell said last weekend, “I wish I could tell you that we were going to get another package, but it doesn’t look that good right now.” That’s not a good sign.
There’s better news on the other big story that I’m following right now—there are signs that Congress will manage to avoid a government shutdown at the end of the month. The government’s fiscal year ends on September 30. Each year, Congress is supposed to approve the 12 appropriations bills that allocate funds to every federal agency and program by that date. If there is no funding plan, the government could shut down on October 1.
Amidst the crisis, Congress has not been able to pass the 12 appropriations bills for Fiscal Year 2021. But neither side wants a government shutdown five weeks before the election. Avoiding it would require Congress to pass a temporary extension of current funding, something known as a “continuing resolution,” or “CR” for short. Earlier this month, House Speaker Pelosi and Treasury Secretary Steven Mnuchin announced that they had agreed to push a “clean” funding extension that would keep the government open and operating through mid-December, or perhaps even longer. The exact date has not been agreed to yet. A “clean” extension means that they will try to keep the bill free of controversial amendments and additions that could make it more difficult to pass.
The agreement between Pelosi and Mnuchin is an important one—but it’s not yet a done deal. Sometime in the next couple of weeks, both the House and the Senate will have to pass such a deal, which hasn’t even been put to paper yet. So that’s never a sure thing. So I will be watching—and the markets will be watching—to see that an agreement to extend government funding gets approved by the September 30 deadline.
Finally, we’re continuing to watch the U.S. Postal Service, which became front-page news in the second half of August. Reports of cuts to services, viral videos of blue mailboxes being removed from the streets, and concerns that the postal service may not be able to handle the flood of mail-in ballots led to widespread outrage. On Capitol Hill, both the House and Senate held rare August hearings at which the new Postmaster General, Louis DeJoy, was bombarded with questions from both sides of the aisle. While he promised to roll back some of the changes and prioritize ballots, concerns remain. The House convened on a Saturday in late August to pass an emergency bill that would add $25 billion in funding for the postal service, a bill that saw 26 Republicans cross party lines to join Democrats in supporting it. But the Republican-led Senate has yet to take up the bill, and it is uncertain whether more money will be forthcoming. Keep an eye on this issue, though, because there are several Republican senators who represent rural states like Alaska, Maine, and Montana who have expressed support for more aid to the postal service. And given the central role post offices will play in this fall’s election, I don’t think we have heard the last of this issue.
On my Deeper Dive, I want to take a look at the experience of individual investors over the last several months, as they negotiate an unprecedented series of circumstances. What are they worried about? What gets in the way of making good decisions? What’s the best way to navigate the challenges of the current market environment?
To explore these questions, I’m pleased to be joined by Brad Bartick, who manages the Charles Schwab branch office in downtown Denver. Brad has conversations every day with investors struggling to make sense of all that is going on. Brad, thanks so much for joining me.
BRAD: Great to be here Mike. Thank you.
MIKE: Well Brad, I know you’ve been working in finance for almost 25 years, but I’m willing to bet you have never seen anything like this. Everyone talks about how this just isn’t normal, so would you walk us through some of the unique things that make the current market so odd?
BRAD: I think it starts with the fact that this is not inherently an economic event. What’s impacting the markets and our economy originated outside the financial system, not from within it.
And I think this matters because in this recession, the economy is another victim of this virus. And this is different than, say, the Great Recession, where the public was a victim of flaws within the financial system.
What’s also unique about this is the sheer scope of the activities we’ve undertaken to backstop our financial system. Think of what the Fed is already doing. Think of the fiscal measures that have been created to protect workers. Think of what federal and state governments are doing to protect us from harm. You know, we’re breaking a lot of norms these days. I haven’t ever seen anything like this—have you?
MIKE: No, I really haven’t, Brad, and I don’t think anyone has. You think about the fact that the Fed runs stress tests on the largest financial institutions, and even their most stringent test did not envision the real-life situation that we’re in.
So all of this is bound to take a toll on investors. What sort of questions are you getting from clients these days?
BRAD: I think it’s important to remember that a lot of investors really had the daylights scared out of them in March. We had a lot of market volatility. The market dropped 20% and actually launched a bear market. And now we’re watching markets, and their approaching all-time highs again. But we just don’t see this sense of celebration that you normally see that accompanies market highs. My personal sense is that people are leery—you know, they’re leery of feeling secure about the something when everywhere else they look feels like it’s full of risk.
We do get portfolio questions from clients about this exact thing: “How can we be near all-time highs?” “Can this last?” “What can we expect next?” Unfortunately, no one really has the answers to those questions. And probably the most common question that we get is simply “What should I do?” And I think that’s a great question to be asking.
MIKE: Well, Brad, I think that is a great point that you make about how we can be near market highs and just not feel that sense of celebration. I don’t think anyone is celebrating very much of anything these days. Well where do you start in terms of helping someone be smart about the actions that they take when they come to you and ask you, “What should I do?”
BRAD: The first thing I ask is, “Do you have a financial plan?” Because I’ve asked this question so many times, I should probably just clarify for listeners what I mean, what I’m seeking when I ask this.
Ultimately, what I want to know is, do you have a long-term roadmap that reflects the things that make you unique, the things that make you different from every other investor that’s out there? And I’m talking about things like your goals, your needs, your unique business and family dynamics, your health, your assets, income, things like that. If you have done that—if you have such a roadmap—the conversation is way easier during periods like this. And that’s because folks that have an active financial plan, they have a platform, and that platform allows them to make better overall financial decisions. I reflect often that a big part of financial planning is really just the talking. It’s the ideation. It’s sharing what’s on your mind and having somebody truly hear you. And then from there, it’s determining, is this realistic? Can you accomplish this? And then stewarding you as you pursue the things that you want. And when you’re committed to a plan, it’s a lot easier to stay the course if markets are rocky, or they’re volatile.
And of course, this begs the question, well, what happens if a person doesn’t have a plan? What normally happens is decision making suffers. It becomes very short-sighted. Imagine if you’re on a highway and there’s a storm up ahead. If you don’t have a long-term travel plan, you’re probably just going to get off the highway and not take the risk of being caught in a storm. But if you planned for a long journey, and you thought that there would be potential storms that could arise, your mindset as you enter that storm is completely different. And a lot of that has a lot to do with the fact that you are committed to a destination. Investing is really not that different. You can’t be successful if you are not planning for storms.
MIKE: Well, so much of investing, Brad, is based on looking at the market’s history or a company’s history and making assessments about how that market or how that company will perform in the future. But the situation we are living in now really doesn’t have a historical precedent, at least not from the investing standpoint. This isn’t like previous recessions, as you said before. So many of the “normal” data points that investors use to make decisions, they just don’t feel relevant anymore. So how do investors cut through all that and figure out what to pay attention to?
BRAD: Well, I completely agree. There really are few historical precedents for the situation that we’re in today.
And I empathize with investors because they’ve really had quite a ride. I think the thing for folks to remember is that we have over 100 years of financial data and science that guides the basic investing principles that have really stood the test of time, and that 100 years covers some extremely dire times for the country. And these principles are things like, have a plan, diversify, rebalance, protect against significant losses. Things like that—these are long-held, proven investing principles.
Right now, we’re in a period where growth stocks are outperforming value stocks. There are people that are asking, “Why do I own all of these other companies if just a handful of growth stocks are outperforming by so much?” Similarly, people might wonder why they have international investments when U.S.-based stocks have outperformed so much.
A lot of the strategy that we use when we build portfolios is to protect us in the face of a future that we can’t predict. All economic cycles will favor and not favor different types of trends over time, and it can be shocking how quickly sentiment can shift. I always think of the tech bubble in 2000. You had a very long period of outperformance from growth stocks. And then suddenly they collapsed, and it was value that took off. And who were the investors that did best? They were the ones that owned both.
A note about time. Timing these shifts is very, very difficult—it’s almost impossible to do consistently. So having broad exposure and diligent rebalancing is really the best path for most people.
MIKE: Yeah, I think we are in a great example of how no one could have predicted this a year ago. You couldn’t have guessed the timing of the situation that we’re in today. Well, Brad, tell me what gets in the way of investors making smart decisions?
BRAD: I like to reassure people that there’s a lot to be optimistic about. Investing “well” mostly comes down to making small, incrementally better decisions over time. And this is stuff we all can do. It’s really these small things, these baby steps that stack up, because time will compound good decisions in your favor. Think of it this way: If I choose to take the stairs every single day instead of an escalator, if everything else is equal, the compounded impact of that decision over time is going to be positive, and it’s going to benefit my health. And investing is no different.
You asked what gets in the way of making smart decisions. I’m sure you’ve heard the saying “We have met the enemy, and it is us.” Well to some degree investing has that same theme. We get in our own way, but it’s not because we’re dumb or we’re flawed. We do it, frankly, because we’re human, and making irrational decisions under pressure is just part of our DNA.
MIKE: Well, you’re talking about the field of behavioral finance, which explores how the way we’re wired as human beings often works against us when it comes to making good financial decisions, right?
BRAD: Yeah, absolutely. Behavioral bias is real.
As decision-makers, we’re constantly doing battle with two areas of bias. So the first bias is a thinking one, it’s a cognitive bias. And it stems from how we process data and information. The second area is emotional, and this is our tendency to make instinct- or intuition-based decisions when we’re acting quickly.
So really, a big key element to investing well is having a process that diminishes the influence that these biases have over us. They have to be managed—they have to be controlled.
MIKE: Well, let’s dig in a little bit more to those common biases. One of them is recency bias, where we tend to look at the most recent information and give it a lot more weight than long-term data, right?
BRAD: Absolutely. I have a funny story from this weekend about recency bias. I live in Colorado—I do a lot of hiking—and this weekend while I was on the trail, I was running along and lo and behold, there was a rattlesnake in the trail. It’s always a little unnerving to stumble across a rattlesnake. So for the next hour or so, I find myself looking everywhere for rattlesnakes, even though the chance of encountering a rattlesnake hasn’t actually gone up. It’s exactly the same as it was before I encountered the first rattlesnake. So what I’m really doing in that moment is I’m attributing more significance to the risk of encountering a snake because my last encounter was so recent. And this is recency bias. It’s the bias that causes us to think that what we are experiencing today is more common than it is. Think of it this way: Because the market is volatile, and it’s scary, it feels like it will always be that way, and it prevents people from taking proper action.
There is another bias that goes hand-in-hand with recency bias. It’s called confirmation bias. And confirmation bias is when we form an opinion about something, and then we tend to ignore information that’s contrary to that opinion. I always think of fans of sports teams when I think of this. Imagine a person that’s committed to believing that their team can’t lose—they’re going to look for information and weigh information with that bias in mind. So they’re bolstering their belief by paying attention to information that agrees with their base premise, and they’re simultaneously ignoring information, even if it’s legitimate data, that disagrees with them.
And as these biases—whether they’re cognitive or emotional—as they take hold, our ability to process information, it gets kind of hijacked. Our emotions are high. And the problem is that once we’ve established a precedent of this behavior—so once we’ve acted on these biases—how do you get out of that trap? How do you right the ship so that you can stop making those kinds of decisions? And it can be a nasty predicament for an investor, Mike.
MIKE: Well, as someone who has spent most of his adult life in Washington, D.C, I can assure you that confirmation bias has reached epidemic proportions here in the nation’s capital.
Well, Brad, do you ever get push back from clients when you tell them to focus on their long-term plans or advise them to better manage their emotions? For example, what do you do if they say—and I bet you’re getting a lot of people saying this right now—“My long-term plan was created in a completely different world than the one I live in now”?
BRAD: Well, to answer your first point about pushback, absolutely. Of course people push back, and I believe that that’s a very healthy thing to do. You want to be able to talk openly and honestly about what you are experiencing. The bottom line about the financial-planning question —should it change because it feels like we’re in a different world than the one in which I created my plan?—so a long-term plan should only change when your needs change. And I’d ask you to think about some of the milestone events that we all experience in life. Our first real job, getting married, buying a first home, having children, some of the promotions that we earn over time, caring for our elderly parents, our retirement, things like that. When your needs are changing, your plan should change. It can be helpful for people to ask, “Have my long-term goals changed for my life simply because the markets are volatile?” Our circumstances may change, but it’s rare that our long-term goals change. And if you stick with your plan, your portfolio can survive corrections, and your plan can, too.
MIKE: Well, that’s a great way of thinking about it—really focusing on the things we can control and not on the things we can’t. Speaking of things that feel out of control, I want to ask you about election concerns. Now the election is only about six weeks away, so how do you talk to investors who are worried? What do you do if they say, you know, they want to make a big change to their portfolio or their strategy based on their fear or hope of a particular outcome in November’s election?
BRAD: So this is a big topic right now, and we do talk to clients about it a lot. And typically we’ll suggest that folks who are concerned about the impact of elections on the stock market just look at a chart of the last 100 years. Most people are surprised to find that elections are less significant than they think.
Mike, I know you get it, and I certainly get it. People have strong opinions when it comes to politics, and there are a lot of myths out there about how elections impact markets. There are many people that believe that markets do better when government’s divided. And there’s this theory that if there’s gridlock, it saves both parties from their worst inclinations, and the market gets to operate more freely. That theory doesn’t actually hold much water. There’s really no discernible long-term correlation between a divided government—or even which party holds the White House—and market returns.
MIKE: Yeah, I agree with you, Brad. And people have to remember that campaign proposals that they’re reading about are a far cry from actual legislation that can pass both houses of Congress and be signed into law. So people tend to look at a proposal in a campaign and think that’s going to happen the day after the election. The reality is that there are a lot of dominos that have to fall in exactly the right order to get from here to there. So I agree with you that I don’t think that people should be making dramatic changes in anticipation of an unknown outcome.
Well, Brad, you’ve given us a lot to think about today. I really appreciate you joining me on the show.
BRAD: Thank you very much, Mike—appreciate it.
MIKE: And if you’re interested in learning more about cognitive and emotional biases and their impact on investing—which Brad and I touched on earlier—check out the Schwab podcast Financial Decoder. You can listen at schwab.com/financialdecoder or in your favorite listening app.
It’s time for my Election 2020 update. We now have less than 50 days to go until Election Day. So here are five thoughts on where things stand and what to pay attention to in the weeks ahead:
First, the presidential race has changed remarkably little in the past three months. According to Real Clear Politics, which averages national polls on a daily basis, Joe Biden led President Trump by an average margin of 7.1 points on September 14. On August 14, just before the two party conventions, the lead was 7.7 points. On July 14, the margin was 8.8 points, and on June 14, it was 8.4 points. In fact, the last time Real Clear Politics had the margin at less than 6 points was May 31.
This is extraordinary consistency over more than three months, especially with everything that has happened in America over that time. And it suggests that there aren’t many undecided voters out there. That’s got to be concerning for the president’s re-election campaign.
Of course, it’s important to remember that we don’t elect the president by national popular vote. We use the Electoral College. And there’s evidence that the race is much closer in several of the key battleground states.
Which brings me to my second big point: Despite the margin in the national polls, this race is not over. Several of the battleground states are showing the race very close, most notably Florida and North Carolina. The most recent Real Clear Politics averages show Biden ahead in Florida by 1 point and ahead in North Carolina by 0.3 points—essentially meaningless gaps that are well within any poll’s margin of error. Florida has 29 electoral votes, and North Carolina has 15. Almost every Electoral College scenario for the president requires him to win Florida, and most require him to win North Carolina. These two states, along with states like Wisconsin, Pennsylvania and Michigan, are going to be critical in deciding who wins the presidency.
Big thought number three: For investors, the most important part of the election remains the battle for control of the Senate—because that outcome will decide whether big policy changes are coming in 2021. No matter who wins the White House, if Congress remains split, with Democrats controlling the House and Republicans controlling the Senate, then the next president is going to have a tough time pushing his agenda through Congress.
Right now, though, Republicans are playing defense in the Senate. There are as many as nine Republican senators that are in very tough fights for re-election. On the other side, there is just one Democratic senator, in Alabama, whose seat looks to be in danger of flipping to the Republicans. If that happens, Democrats would need to win four of those nine closely fought Republican seats to forge a 50-50 tie. And if Joe Biden wins the White House, then a Vice President Harris would be the tiebreaking vote in favor of the Democrats. That would give the Democrats the ability to set the agenda in Congress and potentially pass far-reaching legislation that could have significant impact on the markets. Now, Senate races don’t always follow the presidential vote in their state, so there remains plenty of uncertainty about the outcome.
Fourth, we’ve all heard about early voting and voting by mail and how that is going to affect the election. Well, get used to hearing more about it—because actual voting has already started. Voters in Pennsylvania were eligible to begin voting earlier this week, and by this weekend, early voting will begin in seven more states.
By next weekend, 22 states will have begun accepting requests for absentee ballots, or, in some states, will have begun mailing all registered voters ballots.
There are many implications of early voting, but one interesting one is that it has the potential to lessen the influence of the presidential debates and other late-breaking news developments. The first presidential debate is not until September 29, and the other two debates are on October 15 and October 22. Tens of millions of voters may have already cast their ballots by the time those two October debates come around.
Finally, the other major implication of voting by mail is that it takes a lot longer to count those ballots. It means that we are unlikely to know who won on election night—and possibly for days and even weeks afterwards. The longer that uncertainty continues, the higher the risk for market volatility this fall. It’s something for investors to keep in mind, while being careful not to overreact.
Well, that’s all for this week’s episode of WashingtonWise Investor. We’ll be back with a new episode in two weeks.
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For important disclosures, see the show notes or schwab.com/washingtonwise, where you can also find a transcript.
I’m Mike Townsend, and this has been WashingtonWise Investor. Wherever you are, stay safe, stay healthy, and keep investing wisely.