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Oct. 2, 2020, 12:32 p.m. EDT

Trump’s COVID-19: What the latest election turmoil might mean for your 401(k)

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By Brett Arends

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But.

First, you can’t draw any long-term conclusions from a single instance. Financial strategists keep suffering from “physics envy,” and think they’ve discovered the boiling point of financial water in one atmosphere. But markets aren’t physics.

Going into the 2000 election, gold was around $265 an ounce. Its was near generational lows, was cheap by almost any measure, and had plenty of room to rise.

Today: $1,915.

And back then the yield, or interest rate, on 30 year Treasury bonds was 5.9%, and well above the rate of inflation. Bonds offered plenty of value as a safe haven.

Today the interest rate is 1.46%. That’s actually less than inflation. So the bullish case is pretty slim.

Sure, back then the Nasdaq Composite was deflating from an epic tech bubble, and you can argue we’re in another one right now. But there’s also a big difference. By November 2000 the bubble had already been deflating for nine months. This time around it hasn’t.

What really hit investors back then wasn’t the disputed election, but valuations.

We may think the S&P 500 looks ridiculously expensive today, on a so-called “Shiller” or “cyclically-adjusted” ratio of 30 times the last 10 years’ earnings. But in November 2000 it was trading on around 40 times the previous 10 years’ earnings, during an era of madness never seen before (or since).

The good news?

Those who were not invested in overvalued assets back then did fine. For example U.S. small cap value stocks, which were cheap at the time, fell no more than 5% during the Bush v. Gore recount battle, and ended the year higher than they were on election day. Real-estate investment trusts rose during the crisis and ended the year nearly 10% higher than they were on election day.

This time around, it’s pretty easy to find assets that don’t look like they’re in a bubble. U.S. small cap value stocks (again), as measured for example by the SPDR S&P 600 Small Cap Value /zigman2/quotes/208370743/composite SLYV -2.78% exchange-traded fund, are lower than they were in 2013. Whether they’re going to prove a terrific investment is another matter — there are smart people on both sides of the debate. But it’s hard to argue they’re in the midst of a massive overvaluation bubble.

Ditto many overseas markets. They have gone nowhere for a decade or more, especially when measured in U.S. dollar terms. Emerging market stocks, as measured by the MSCI Emerging Markets index, are lower than they were in 2007 and 2018. And “International” stocks, as measured by the MSCI EAFE index of developed international markets—Europe, Japan and so forth—has barely advanced in 20 years.

Jon Ulin, a financial adviser in Boca Raton, Fla., tells me investors need to avoid reacting emotionally to day-to-day election coverage. “We remind our clients that when headline news drives humans and quants to sell out of the market while driving volatility, that it may actually be a great buying opportunity whether you are sitting on cash or dollar-cost averaging into your employer’s 401(k),” he says.

/zigman2/quotes/208370743/composite
US : U.S.: NYSE Arca
$ 77.58
-2.22 -2.78%
Volume: 198,124
Dec. 5, 2022 4:10p
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