Why Have We Taken Our Defensive Position Up to the 50% Level?

by Eric Nager on Nov 3, 2020

Going into the final days before the election, the race has tightened significantly in the battleground states, consequently the threats of strife and violence have greatly increased. This is unprecedented for the United States which is considered to be the most stable democratic-republic in the world. There are reports that both the left and the right are preparing for possible conflict. A number of cities are boarding up in advance to prepare for post-election violence. This is the primary source of the uncertainty that has prompted us to increase our short-term treasuries plus cash to the 50% level.

The secondary source of the uncertainty is the response to the Covid-19 spike in cases, especially in Europe. We are not judging whether the lock downs are an appropriate response to deal with the virus or not, but the effects would be disastrous for their economies and would have an effect on global trade. These types of government policies cause markets to be very nervous. Furthermore, with the number of cases also spiking in the U.S., Vice-President Biden indicated that if the medical experts told him to, he would lock down the American economy.

To put things in perspective, we believe that both of these situations are temporary. The election outcome will eventually be determined and the losing side will come to terms with it or be forced to accept it. Regarding the virus, therapeutics and vaccines are on the relatively short-term horizon and are believed to be the ultimate answer to the virus problem. So, we are talking about weeks or months not long-term but the shocks could be dramatic in the near-term.

Remember, the outlook for 2021 is still very bright. GDP came in at a record pace in the third quarter and corporate earnings have been very strong. Inventories will need to be rebuilt and the stimulus will almost certainly come in both Europe and the United States by January. We are looking at possible short-term pain that could be intense but ultimately next year should be positive.

We are hoping and praying that we are wrong about the turmoil and strife for the sake of our beloved country. We are also preparing to act rapidly to reverse course if in fact we have misjudged. Erring on the side of an abundance of caution is more acceptable to us at this time. The risk that we might miss out on some gains until we can reverse course is a limited risk.

As always, please call or email with any questions or concerns!

Terry E. Nager , CFP ^® , ChFC ^® , CLU ^®
President