October 2020 – 

 

September 2020 Market Update

 

QUARTER REVIEW: Stocks Prove Resilient

Stock and bond markets delivered strong returns in the third quarter. U.S. and foreign stocks continued to recover from their March pandemic-driven lows.  U.S. stocks returned 9.21% in the past three months and foreign stocks returned 6.34%.  Stocks benefitted from better than expected economic trends, such as better job growth and stronger retail spending, and stronger than forecast earnings.

While company earnings were certainly impacted by the economic shutdown and uneven pace of reopening, company profits held up better than expected. Bonds also delivered positive quarterly returns. While bond returns were modest at 0.62%, the results were impressive in light of the significant reallocation of funds toward “risk on” investments such as stocks.

 

ECONOMIC NEWS: Moderating Improvements

Major economic indicators (unemployment rate, retail sales, manufacturing orders, hours worked, and job growth) posted significant improvements in June, July and August. As the economy reopened, consumption, mobility and business activity increased, spurring supply and demand improvements. The direct benefits from reopening the economy coupled with massive fiscal (expanded unemployment benefits and stimulus checks) and monetary (interest rate cuts, bond buying programs) stimulus jolted the economy back to life. This was certainly welcome news and helped explain the initial disconnect between the stock market recovery and recessionary economic conditions. 

Recent economic data shows a continuing economic recovery, but at a slower pace. This is not surprising. As the fiscal and monetary stimulus slows, traditional economic drivers will determine the pace of the recovery. So far, so good.

 

UPCOMING ITEMS TO WATCH: Uncertainty is the Consensus

The two most frequent questions from clients are: What happens if Trump wins?  What happens if Biden wins?  

First, stock returns are not materially different in periods when a Republican is President versus periods when a Democrat is in the White House.  Second, picking sector winners based on election results is difficult.  For example, conventional wisdom is a Republican-controlled government would mean less regulation for certain sectors. Since Trump was elected, the worst performing sectors are financials and energy. These are two of the most highly regulated sectors. 

Finally, election uncertainty is the consensus view. In other words, if most investors are expecting election uncertainty, will actual uncertainty surprise anyone? Increased volatility is certainly possible from election results and events. However, stocks are long-term investments and owning stocks requires a holding period far longer than an election cycle.

We know these are trying times for many clients. We are here to listen and advise.