Quarterly Market Review and Outlook
2020 Q3 Financial Market Re-Cap
2020 has proven to be one for the record books. While the U.S. economy is still in a recovery phase, the stock market as defined by the S&P500 index briefly hit a new all-time high during the 3rd Quarter. That seemed somewhere between impossible and “are you crazy?” during the dark days of February and March. We would suggest most of the credit for that is due to an extraordinarily strong economy prior to COVID-19 and significant Federal Reserve action since the shutdowns.
Through the 3rd Quarter 2020, the technology heavy S&P 500 index is up approximately 5%.[i] The DOW Jones Industrial Average is much less tech oriented and the returns show that with a YTD loss of almost 2%. Small company stocks fared much worse with a YTD loss of over 10%. Non-U.S. stocks are down 5% so far in 2020.[ii] The bottom line is, outside of U.S. technology and growth stocks, the stock market has been mostly down this year.
The bond market offers income and risk reduction relative to stocks. It also, in many market cycles, is a better “safe” alternative than cash. Through the 3rd Quarter 2020, the U.S. bond market returned 6.5% this year.[iii] The U.S. bond market significantly outperformed the non-U.S. bond markets so far in 2020.[iv]
2020 Q4 Outlook
November 3rd is only 4 weeks away and the 2020 Presidential election is the hot button topic on many people’s mind. As we have previously stated, we are not election outcome forecasters. Trump is down in the polls (as he was in 2016) and the election will be determined in only 7 or fewer key states. It appears that most everyone thinks the Democrats will hold the House while the Senate race looks very tight.
We like to remind folks that our Founding Fathers put together an ingenious system of government. One that requires either one-party rule or compromise to get laws passed. It seems likely, that this election will not produce one-party rule. In other words, it seems unlikely that either the Democrats or the Republicans will control both Congress and the White House. If that turns out to be true, the next Administration will need to make compromises to get anything done legislatively.
Many people are predicting a contested election or a lack of clarity on election night. This is certainly a possibility as it is likely that absentee, mail-in voting and longer in-person lines are probable as the country attempts to navigate an election cycle during a pandemic. We only need to point out the 2000 Bush/Gore election cycle to recall election confusion and chaos. The Supreme Court ultimately ended the recounting process on December 12, 2000.[v] Al Gore consented the following day. From November 7 through December 13, 2000, the S&P 500 declined 5%.[vi] A decline but not a crash.
We also find it constructive to look at the data when Democrats control D.C. (President plus Congress) as compared to Republicans and split control (one party has the Congress, the other has the Presidency). Over the last 50 years (1970-2020), these three scenarios have produced mostly similar results as it relates to stock market performance.[vii][viii][ix] Its almost as if the financial markets go up in spite of who is in charge. This reminds us that the stock and bond markets primary respond to Corporate earnings and Federal Reserve action. Political climate is secondary to these.
In short, we would caution folks to look beyond the political train wreck that is in Washington, D.C. An investment strategy built around who is in control in D.C., at least from a historical perspective, is flawed.
These are some thoughts from folks that we follow:
“If Joe Biden wins the Presidency and the Democrats take the U.S. Senate, it would likely be by a very narrow majority. In that instance, we would imagine at least several Democrats balking at immediately imposing tax hikes. Remember, when President Obama took office in 2009, the Democrats had 59 seats in the Senate, and taxes did not go up until 2013. This was because Democrats were hesitant to hike tax rates when unemployment was high, and the economy was slowly recovering from the Financial Panic of 2008-09.”—First Trust[x]
“Given the exceptional rally the stock market staged leading to the September 2nd S&P 500 closing high of 3580.84, market weakness has the potential to lead to a quality risk-reward interim buying opportunity in the weeks ahead.”—Bob Brinker[xi]
“Professor Siegel thinks much of the uncertainty is already depressing prices. And unless we get total disruption after the election-even if we get a Democrat sweep that is not something like 60-40 in the Senate, the resolution of uncertainty may spark a really strong November and December rally that will surprise people.”—Dr. Jeremy Siegel, Professor of Finance at The Wharton Business School [xii]
“Sticking with a sound long-term investment plan based on individual investment objectives is usually the best course of action. Whether that strategy is to be fully invested throughout the year or to consistently invest through a vehicle such as a 401(k) plan, the bottom line is that investors should avoid market timing around politics. As is often the case with investing, the key is to put aside short-term noise and focus on long-term goals.”—American Funds[xiii]
As we mentioned in our previous newsletter, the 2nd Quarter economic decline was the worst since the Great Depression. Well, the 3rd Quarter is shaping up to be the best! The Atlanta Federal Reserve current 3rd Quarter GDP projection is growth of 32.0% annualized.[xiv] The U.S. economy is growing surprisingly well in the aftermath of the COVID induced shutdowns.
Unemployment peaked at 14.7% in April. While unemployment still has a ways to go to reach pre-COVID numbers, it has steadily come down since the peak and currently stands at 8.4%.[xv] .[xvi] As more impacted workers return to the work force, we would anticipate consumer spending to increase. This is extremely important as we have often discussed that consumer spending accounts for roughly 65% of the U.S. economic economy. When people have jobs, they spend money. When people spend money, the economy grows.
The race to recovery has started and is progressing very nicely but, is far from over. Many believe it will be 2022 or beyond for a complete and total recovery.
Federal Reserve Action
The Federal Reserve continues to maintain their extremely accommodative stance. Based upon some data that we track, it appears unlikely that the Federal Reserve plans to increase interest rates through 2023.[xvii] We can look at that in a positive light that lending should remain very attractive to individuals and businesses over the next several years.
Additionally, when rates are low and the yield curve is steep (i.e., long term rates are greater than short term rates), the economy has a lower probability of recession. This is not an absolute, but we would generally feel better when the yield curve is steep than when it is inverted. Inversion appears nowhere near on the horizon.
It is important to note that the Fed is apolitical. They have given every indication that they will not change the current accommodative policy though 2023, regardless of the election outcome.
We would expect many to be extremely nervous due to the election cycle that is being billed as the most important in the history of our country. This is a reasonable emotion as we all must suffer through the constant bombardment from mainstream news outlets, social media, and water cooler discussions. We have said, and will continue to say, that the media has gone from bad to terrible over the recent decades. They divide, sensationalize, and mislead. They are directly responsible, in our view, for much of this anxiety.
Our advice on the election is to vote your conscious. Yes, elections have consequences. Know who you are voting for and why.
COVID-19 is real. Modern medical technology, however, is getting better every month at combatting the virus. Many pharmaceutical companies are working on a vaccine. It seems possible that a vaccine will be fully approved and available by the end of this year. Considering where we started, this is terrific news.
Our recommendation is for people to focus on their unique financial goals and situation. That includes taking an appropriate amount of risk but mitigating that risk through diversification and by taking a long-term view.
Be certain that we will be following all this very closely in the weeks and months ahead.
Thank you for your continued confidence and trust!
We hope that you and your family have a great fall and holiday season!
[x] Wesbury, Brian S. & Stein, Robert. “The Long Slog Recovery”. First Trust Monday Morning Outlook. September 21, 2020. First Trust Portfolios.
[xi] Brinker, Bob. “Bob Brinker’s Marketimer”. Volume 35, Number 10. October 3, 2020.
[xii] Siegel, Jeremy J. & Schwartz, Jeremy. “Weekly Commentary with Professor Jeremy J. Siegel: Uncertainty Creating a Negative Overhang for the Markets”. September 28, 2020. Wisdom Tree Asset Management, Inc.
[xiii] “Guide to Investing in An Election Year: How to Survive the Uncertainty and Invest With Confidence.” The Capital Group®. Page 7. 2020.
Securities offered through First Heartland Capital ®, Inc., member FINRA/SIPC. Advisory Services offered through First Heartland ® Consultants, Inc. Walker, Higgins & Associates, LLC and Walker, Higgins & Associates Wealth Management, LLC are independent of First Heartland Capital ®, Inc. and First Heartland ® Consultants, Inc.