There is only One Million Dollar Question in the financial markets in recent days is the United States Presidential Elections 2020.
Active Market Traders have been booking and closing all their position off the table due to the unpredictability of the outcome of the elections.
This has triggered a huge spike in volatility in the last one month. The stock market continues to tumble in the previous October Monthly expiry week.
UNITED STATES PRESIDENTIAL ELECTIONS 2020
The Trending Topic to be blamed for the huge downfall recently is ‘Elections’. We are not talking about Indian State Elections which is currently undergoing in Bihar. It’s the one on the other side of the Globe.
We will be seeing huge volatility and uncertainty in the next few days by 6 November, Joe Biden and Donald Trump will know their fates on Tuesday, 3rd November 2020, Wednesday morning in India.
No matter who wins, as well as the margin of victory, the financial markets globally will react in any directions up or down.
A huge number of Smart Investors and Traders are positioning themselves accordingly. We had already witnessed a huge profit booking at 12,000 and 40,000 on the Nifty and Sensex, respectively.
As we see the short-term trend is bearish but who knows because anything could happen on Wednesday and Thursday. It’s going to be a roller coaster ride. A lot of bets will be gained and lost in this ride of volatility.
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If you accept the challenge and dare to trade this volatility, I will wish you Good Luck and God Bless You. You will really need it!
We are in the last leg of the United States Presidential Elections.
From what I have been regularly browsing, the world over the portfolios is being tweaked in anticipation of the victory of either Donald Trump or Joe Biden.
The real thing is that it is not only about who will win Either Democrats or Republicans that are being speculated here.
But also, what this victory might be a turnaround factor for the stock markets.
In the last 2016 United States Presidential Elections, we had seen the majority of analysts and market veterans experienced a colossal failure in predictions on both fronts for Hilary Clinton and Democrats.
First, against all the odds in the universe, Trump clinched an outstanding Victory.
Second, unpredicted, the United States stock markets cheered Donald Trump’s victory, instead of giving him a thumbs down.
So much for all the advanced data analytics and expertise!
As we are Humans and we don’t ever learn from past mistakes and history. This seems to be truer for all the analysts across the world.
As per My view, we might have the Strongest ever-volatile week or probably month ahead.
As it is the law of nature, the money will always find its true value. I believe if you are always behind chasing value rather than thinking of liquidity and have patience, your investments will excel in the future.
As per a huge number of requests from our loyal followers and subscribers for an update on the gold bull market. We had covered the short-term and long-term impact on gold due to the United States elections.
To be wise, I am really a bit concerned in the last week while using the word ‘value’ or ‘value investing’ in these uncertain times.
You all are already aware I have been reading a lot of books, listening to the audio, and watching videos for value investing, especially in the post-Covid market rally.
If you go by the Business Channel, Financial newspapers, and magazines, value is out of favor, with more fund managers transforming its camp of growth investing.
However, I assume there is a fallacy in this broad and sweeping narrative.
One thing to remember that investing is always multidisciplinary.
Right at the epicenter of conventional value investing is the assumption that the intrinsic value of an organization mostly doesn’t change.
It’s about purchasing a stock whose intrinsic value you identified out to be Rs 100, at a discount of around 40 percent (minimum), and then sell it as soon as the stock reaches the intrinsic value.
In laymen terms, it means if you find and buy a stock with an intrinsic value of Rs 100, then buy it at around Rs 60 and then sell it at Rs 100.
And then we have identified them as growth investors…
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Means They always hunt out for organizations that provide solid earnings growth. They are not passionate about valuations while buying growth stocks.
Both kinds of Investing methods and strategies have proven to have delivered returns in the past if you look at the history over the last few 10 to 20 years.
However, recently this breed of conventional value investors has lagged behind the growth investors.
Sensex is trading at 30 times P/E (price to earnings), a valuation that would make conventional value investors frown.
The passion for growth stories is scaling up massively. In the United States, FAANG (Facebook, Apple, Amazon, Netflix, and Google) stocks are in obsession. Investors are so much motivated by this approach that they are willing to pay any damn price to buy them.
In the last couple of days, i had come across a couple of People are taking a huge amount of money to invest in Ant Group IPO (Initial Public Offering), which is reportedly bigger than the GDP’s (Gross Domestic Product) of some of the top 50 countries in the world.
This mind-blowing fact helps to bring out the most important debate – What really works: Value or Growth?
And which Trading strategy or Investing Approach you should truly focus on in order to maximize your wealth opportunities.
This set of examples and observations will not help us to jump to any conclusion on which Method wins. It also does not provide you an insight that will excel your returns in the future.
Well, I believe that’s the purpose of this research and findings is to dispel the idea that one particular approach is superior to the other.
As per my view that value and growth cannot be segregated. They aren’t mutually exclusive.
We have seen quite a couple of a number of incidents where the book values have gone next to negligible over the span of years due to bad business models or in competitive management in the first place.
Purchasing them and investing for the medium or long term will have no impact at any discount to book value, irrespective of how attractive are the valuations. These are classic cases of value traps.
It would be foolish if you look only at price to book value multiples, or also its past growth rates on a cumulative basis and make an intelligent guess of stocks which will promise you maximum returns and good results.
For any successful investor, the toughest goal is to investigate and scrutinize the company and its business models you invest in.
A stock backed by a reputed group that has showcased poor returns on capital across cycles and still consistently to be high in debt is unlikely to offer a good rate of return, no matter how cheap valuations you are getting to invest.
Contrary, when you are identifying strong fundamental growth stocks, depending on past growth facts and numbers will not be the only tool for investing.
You have been precise and encouraged that the growth is sustainable and virtuous in nature.
You should always keep in mind that incremental growth will always come with high returns on capital. In other words, each time one reinvests in the business, the return on incremental capital remains expensive.
If you are not able to search such kind of businesses, it would not be so difficult to enter their stocks at seemingly high multiples, that a typical value investor will never think in that direction.
The next important question is: What price should you be willing to pay for growth?
Let’s say you have two companies, or stocks A and B.
At the end of Financial Year 2020, both have earnings of Rs 1,000. The P/E multiple for Stock A is 30 times, while for Stock B, it is 15 times.
Stock A never pays dividends and reinvests all the earnings back in the business.
Stock B, on the other hand, provides you a big dividend payout of 70 percent, i.e., 70% of its earnings are paid out as dividends, and 30% is reinvested back in the business.
Stock A is able to earn a return of 25% on the earnings reinvested, while stock B earns a return of 10%.
Which stock would you consider buying, from a 5 to 7-year time horizon – Stock A with a P/E of 30 times, or Stock B with a P/E of 15 times?
Stock A, which you purchased at a P/E of 20 times, and has never paid dividends, but has given a performance at a Compound Annual Growth Rate of 20 percent.
Stock B, which you bought at P/E of 10 times, and with a dividend payout ratio at 70%, has given a consistent performance of around 14% CAGR.
So it means you have to be truly confident of discovering such companies that can grow and again reinvest their incremental capital at high rates of return, and also happily paying a dividend for the quality.
And one thing I want to make it clear, then this scenario, is not a prejudiced verdict against value investing.
But this approach just focuses on the value that grows with time like wealth.
But One Important Thing What about the Long-Term for Stock Market, Gold, and Dollar?
Now, in my one of my couple articles, I had shared you about the different kind of Bullion, Forex, and Commodities Cycle. Now, in this cycle, we have seen that the main objective for any political leader in any place in the world is to get nominated again or re-elected. That’s the basic motto and they will do whatever it takes to make sure that their chances of getting re-elected and Mandate, are maximum.
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So with respect to the United States, we have already noticed that as times when we get closer to the election countdown, everything almost pans out in a predictable fashion. The equity markets try to move up, the interest rates begin to drop, and every American’s dream is buying a house, so housing becomes affordable, or purchasing a house becomes affordable. Unemployment is also kept at a lower level.
Finally, once the elections are done and become past, there is relatively no incentive for the president or for the elected party to keep all these things as they were before the elections. So their main goal and priority after the election results are announced, changes to greasing the palms, or helping those who had got them elected.
So this is usually that happens across the world, and we have seen already in the past that the stock markets start for a bigger correction in the first two years after the election results are finished and, in the 3rd, and 4th years, the chances of a strong rally and bounce back increases.
Now, this set of cycles has been already been beautifully working over a long period of time i.e. for almost 50 years, this cycle has worked successfully. Since we are so close to the election results, that will be in this week, and we could clearly see that as per the previous election cycles and the chances of a major strong upside in the stock market, on Wall Street, are limited.
Now, apart from this, there is one major important perspective I need to share that we had seen earlier with respect to gold. Now gold performs outstandingly well in times of uncertainties. Previously in my couple of articles wherein I had shared lots of insights that how gold had moved in the previous two recessions. So that was in the year 2000 and in 2008.
So during both these recessions, the United States Fed had taken a bold step for cutting the interest rates. Now as soon as the United States Fed begins cutting rates, it will trigger gold to move higher, and over the next 3 to 4 years, the performance of gold is exceptional and this is this could be the case right now in the year 2020 as well.
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We have seen that in March 2020, the Federal Reserve of the United States cut interest rates almost in an emergency. The called an emergency meeting had cut interest rates from 1.75% to almost zero levels within 15 days, and gold had been rising consistently after that moment.
So we can see gold upward trends for the coming 3 to 4 years. Now, the culmination of both these things in the United States presidential cycle and the Equity markets, where the chances of the stock market moving up are low, and the second thing is gold. The chances of gold moving up from here are very high.
Now the culmination of both these things could be seen in this particular chart, which is the ratio chart of the Dow Jones to gold. Now, this is a long-term chart of Dow Jones to gold.
Now if you can do one thing to google for the Dow Jones to gold ratio chart and you can see the moves in extremely cyclic fashion and what it alerts us is the extreme levels in Dow and gold and their relationship to each other. So there are key points that are when stock markets or Dow Jones trades at an extremely expensive level compared to gold. And These important points are, as you can check out are the years of 1929, 1966 and 1999.
There are a few points when the stock markets or Dow Jones trades at a reasonably cheaper level compared to gold. And it was spotted in 1933 and again in the 1980s. So as of now, we are witnessing is that the Dow Jones to gold ratio chart is already in a downtrend.
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And if you also check out on a weekly chart of the same Dow Jones to gold ratio chart and you know the real picture of this ratio chart has already formed a head and shoulder pattern between 2017 to 2019. Head and shoulders is a bearish reversal pattern and it suggests that whatever security you are seeing could have lower.
Now based on this assumption of this reversal pattern, Dow Jones to gold ratio chart could see a huge downfall and it has already fallen. Out here, you can see that the ratio chart was slowly consolidating in a symmetrical triangle and chances are that it could break this asymmetrical triangle and could go for a deep dive in short term.
So as per our study, research, and assumption, we had made you aware of this development till now and it is more likely that Gold will be outperforming the Dow Jones from these current levels are high. And if you calmly think about the United States Presidential Election, Federal Reserve Policy Actions and Pending New Mega Stimulus Deal in the pipeline, we can see a strong case for the yellow metal to move higher and may trigger correction for United States Equities Markets, and as per the assumption will tend to go lower at a fast pace.
As per my view that the US presidential cycle or the US presidential elections once are finally announced by end of this week. I really assume that we can see a strong case of gold’s outperformance from here are very high, and it may also last for the coming 2 years could be the right asset during uncertain times that you must own in your portfolio.
Now if come to the Indian Stock Markets it will continue to remain highly volatile in the near term largely on the back of upcoming United States elections as well as a huge spike in COVID infections and the second lockdown in countries across the world, but that will be an opportunity for long term investors later but for now, it will be a wise decision for investors to convert their portfolio in two different parts. Investors can keep around 40% of the portfolio in long-term investments while the rest 60 percent could be in liquid cash that can be used at times of volatility and opportunities to buy at deeper corrections.
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As per my advice Investors should instantly differentiate their portfolio between short term trading and long term investment. Currently, 40 percent of the total exposure of the portfolio should be long term while the 20% could be for short-term trading where one can cash calls whenever the time is right and the last remaining 40 percent to sit on cash.
I am telling you to be 40% sitting on cash, it makes sense for investors to remain in cash not just because we are heading towards the highly speculative and volatile event of United States elections but also because we have seen the market zooming upwards only in one direction in the last couple of months since lockdown.
One piece of advice that if you can really study and examine the Dow Jones to gold ratio chart on a timely basis. This ratio chart will help you identify tops or bottoms or extremes in the stock market worldwide as well as commodity markets on a regular basis.