One week from today is Election Day. The opening words of our Constitution, “We the people of the United States,” will be buried in rhetoric from both parties over the next several days as divisions are further stoked. While an important aspect of investing is to not let emotion and behavior work against you, noisy political rhetoric can make that difficult. And in the midst of uncertainty it is hard to see the big picture. The #1 way to build wealth is to invest in stock of high-quality companies that have little or no debt, good earnings growth, and rock-solid cash flow – and the outcome of the elections will not at all change how well that strategy works. Data shows that the markets do well regardless of political control in Washington.
We never get to the point where uncertainty and concern goes away. Here we sit, just 5% below all-time highs in the markets, during one of the most challenging years I have seen during my 28-year career. Wow, time flies! Year-end is a great time to revisit your big-picture financial/investment plan, so please reach out to us if there have been changes in your life that warrant adjustments to how we manage your portfolio. This year has been difficult in so many ways, and we are so thankful that you continue to have confidence in our ability to navigate 2020 and produce profitable investment results for you.
I believe the best defense when investing is to hold stock of high quality companies, and 2020 is again showing that to be true. Recently, Home Depot released solid Q2 earnings of $4.02 per share. Analysts from 27 Wall Street firms had projected numbers ranging from $2.33 to $2.97 – way below the actual results. Same-store sales were projected to have risen +11.4% – this equalizing revenue figure actually shattered that estimate, coming in at +23.4%. Home Depot has been a core stock holding for clients since I first started Pawleys Investment Advisors in 2010, and continues to deliver good performance for us. We are coming to the end of Q2 earnings season, and this has been a common trend where many companies have reported much better than expected earnings as the US economy re-opens. We are by no means past the difficulties presented by COVID-19, but we are quickly moving through these challenges.
In this unique environment there are many moving parts to assessing the financial health of both the overall economy and individual companies. I will reiterate that Central Banks across the globe have many tools available to help normalize economies, and they have made it clear that they will provide whatever back-stops are needed to support individuals, the private sector, and local governments. That being said, persistently low interest rates are likely here to stay, and present a challenge to investors trying to meet financial goals. At the end of the day, corporate earnings drive stock market prices. Through mid-August the Pawleys Dividends stocks, which most of our clients hold as a core of their portfolio, were up +6.46% for 2020, versus the Dow Jones Industrial Average, which is still down -3.25%. This is a fantastic result, especially after having returned +40.6% last year (outpacing the market by +14.8%). For every $100,000 invested, this is a net difference of several thousand dollars for both years compared to what an index fund would have generated. I don’t beat the market every year, but the 10-year track record speaks for itself, and we are proud but humbled to be able to generate such amazing returns for everyone. In my opinion, high-quality, US blue-chip dividend stocks continue to be the single best investment in the current environment.
Corporate earnings are what ultimately drive stock prices. Please be aware that with the upcoming elections many economic issues will become politicized in extreme ways, and as we all know, most messaging will come with a negative slant. It can be difficult to remain objective when emotions are running high, but any political back-drop should not play a role in how your investment plans have been crafted. The quarantines and shutdowns of 2020 came during a time when our economy was solid, and after a very short and severe recession, companies are pivoting where needed and finding new ways to conduct business in a safe way. It has been a long, challenging year, but we are grateful to be in a position to help everyone navigate both financial and investment decisions during this time. With the market having recovered, now is a good time to take money out of the market to meet any needs – a few of our clients have taken advantage of our gains and taken money out to pay off remaining mortgage balances, which is a critical goal for anyone approaching retirement.