Communication, Interrupted

Friday Reflection | October 2, 2020

Communication, Interrupted

The debate earlier this week kicked off the election season in earnest and offered a microcosm of the current US political climate. It featured cross-talk and interruptions rather than listening, racial tensions rather than messages of unity, and a disheartening lack of respect for the democratic process. The spectacle left many viewers depressed about the inability of the candidates and moderator to engage in civil communication, and others with an added sense of urgency about the chaotic sprint to election day.

The list of election concerns expanded late in the week when President Donald Trump, the First Lady, and a top advisor all tested positive for coronavirus. The news of Trump’s diagnosis is being digested as a short-term market negative and could worsen if his condition worsens. In addition, the next presidential debate and Trump’s campaign trail may be interrupted in yet unknown ways, adding new considerations for investors and voters alike.

More broadly, the US stock market moved slightly higher this week as the third quarter ended, but concerns about election-related volatility in Q4 remain solidly in place. Setting aside near-term volatility, the overall market trend will continue to be driven by the progress of economic recovery, stimulus efforts to help the millions of unemployed Americans, and clarity on the pandemic trajectory and vaccine efforts.

Stimulus efforts continued this week with Nancy Pelosi and Steve Mnuchin searching for common political ground; unsurprisingly that is elusive territory at this point in 2020. Encouraging statements were made, but ultimately no deal was reached. Pelosi said that Trump’s diagnosis could change the dynamic of the negotiations, and could add urgency to a GOP that has downplayed the risks of the virus.¹ That may prove true since there is a broad consensus that further stimulus is needed. Still, material differences persist regarding the size and optimal structure of a plan to support US households.

This inability to communicate and build consensus has led to announcements of new layoffs by many employers. American Airlines and United Airlines told employees they will go forward with more than 32,000 job cuts. Insurer Allstate plans to lay off 3,800 employees, roughly 8% of its total headcount. In the financial industry, Goldman Sachs and Citigroup are each planning layoffs including senior-level positions. Walt Disney announced permanent layoffs for 28,000 theme-park workers who were previously on temporary furlough. These companies had been holding on for economic recovery or a stimulus bill that offered a temporary lifeline, neither of which arrived in time.

This week’s jobs report, the last one that will be released ahead of the election, may weigh heavily as investors decide whether the recovery is stalling.  Progress has been made, with the economy having now recovered 11.4 million of the 22 million jobs lost in March in April at the beginning of the pandemic, according to the Labor Department.  Job growth, though, is cooling, and September marked the first month since April that net hiring was below one million.²

Layoffs are not uncommon for companies trying to control costs during periods of depressed revenues, or non-existent revenue in the case of Disney’s theme parks. Some companies vowed to partially reverse the layoffs once a stimulus deal is reached, or coronavirus-related restrictions are loosened, creating the perception that this is a temporary situation. Financial markets still expect a new stimulus package before the end of the year, even if it doesn’t arrive before the election. If the election is contested and tensions rise, the communication on stimulus efforts could break down even further.

The stock market reflects the aggregate expectations of investors at any given moment, but it is not a crystal ball. When the unexpected occurs, price movement is likely. In 2000, in the Bush v Gore election, the race was expected to be close, but not so close that results would be delayed. When the outcome was contested, the S&P 500 dropped by -8% in the five weeks following the election while recounts progressed, and the Supreme Court had to ultimately rule on the veracity of Florida’s ballot count. Once clarity was reached and Florida’s electoral votes allocated to Bush, the market recovered most of those losses in the subsequent weeks.

Efficient market theory says that all publically available information and current predictions about election risk are already incorporated into market price.³ In 2020, most everyone is expecting the election to be contested, and results to be delayed. While market volatility may still increase, this event won’t be the total surprise we saw twenty years ago. On the contrary, if elections margins are wide enough to call a definitive winner on November 3rd, the market could potentially rally on the fact that priced-in fears did not materialize.

From updates on stimulus negotiations or vaccine trials to reporting on election results, effective communication allows us to form expectations and act accordingly. Companies do this with earnings releases or news of layoffs so that investors can adjust their expectations, moving prices upwards or downwards based on the perceived impact on future earnings. In 2020, this ‘forward guidance’ has been an especially critical element of quarterly earnings calls.

While much attention is given to communication from companies to investors, the dialogue can flow in the opposite direction as well.  Shareholders are partial owners of a company, and in that capacity, they can vote to influence corporate behavior toward a more responsible direction.  Recent resolutions by shareholders have forced companies to consider more stakeholders – ranging from their employees, to customer health, to the environment in which they operate. See our recent Q3 Impact Highlight Report for an example of how this process led Kellogg’s change their usage of a harmful additive, glyphosate,⁴ based on positive pressure from shareholders.

In our relationships with clients, communication matters. Clear and complete data is beneficial for markets and elections; it also helps people develop conviction and make decisions about their financial path. Similarly, proactive communication allows proper time to reconfigure expectations and mentally prepare for their next steps.

One area where this is especially productive is our work with our clients to help them build and protect their legacy. Our work may focus on the financial aspects of legacy and alignment of financial resources with our clients’ values, but the conversation extends well beyond finances. Legacy can involve charitable giving, investments in education and support for children, and leaving a world and planet that is suitable and sustainable for future generations. Building a legacy looks different for each family, but when done well, it is always an intentional process.

Voting is another way to communicate support for a particular vision of our country’s future. We encourage our clients to vote in this election, and all elections, as a meaningful way of being invested in our shared legacy. Regardless of the outcome of this election, we will continue to help our clients stay intentional as they craft a financially resilient future.

¹ Trump coronavirus diagnosis changes dynamic of stimulus talks, Nancy Pelosi says. CBNC. Published Friday, October 2, 2020

² U.S. Job Gains Slow as More Layoffs Become Permanent. WSJ. By Sarah Chaney. Published, October 2, 2020

³ Efficient Market Hypothesis defined. Investopedia.com

⁴ As You Sow.  2019 Corporate Resolution Tracker.