Fall 2020 Market Commentary

By Marc Usem

Despite a pullback during the month of September, the third quarter of 2020 was very good for stocks. The S&P 500 was up 8.9% for the quarter and 15.15% from twelve months ago, driven largely by U.S. technology stocks. The bond market, as measured by the Bloomberg Barclays U.S. Aggregate Bond Index, was up just 0.62% for the quarter, but up 6.98% for the past twelve months, due to falling interest rates. Performance trails off quite dramatically with small cap stocks and international stocks. Small stocks have lagged significantly, adding 3% for the quarter and actually declining by -8.3% during the past 12 months, while international stocks are up 4.92% during the quarter and gained just 0.16% for the past 12 months.

Investment advisors are an interesting bunch. We get excited when markets drop, due to potential opportunities, and anxious when markets do well. The past quarter was no exception. Areas of concern included:

• New trading applications, used mostly by younger investors, that are designed to look like a Las Vegas casino.
• Stocks that have performed extremely well, with names that sound similar to new technologies but have no actual relationship to that company.
• Stocks that have split and then jumped in price even though there was no change in the economic value of the company.

These disparate events, all occurring in a relatively short time frame, raise our antennas and temper our outlook.

The current Covid-19 pandemic moves us into uncharted territory. While we have had pandemics in the past, and certainly the 1918 flu pandemic resulted in worse mortality than the current pandemic, we have few modern parallels when it comes to the stock market impact. While we believe the drawdown in March was overdone, so too has been the rebound. While we believe brighter days for the global economy lie ahead, how and when we get there is highly uncertain.

Investors’ attention is now shifting towards the Presidential election. There is much concern on both sides that if the other party wins, the market and economy will suffer. The historical research has shown that there does not appear to be significant relationships between presidential elections and stock market performance. It is likely that stock performance this year will be largely dominated by the trends of the pandemic, rather than who occupies the Oval Office. Nevertheless, we know markets dislike uncertainty, and there is a large amount of uncertainty surrounding the election. One scenario is the possibility that the election may not be decided on Election Day, as votes may take longer to collect and count. The longer the counting process takes, the greater the potential for a contested result, which could create market discord through December and possibly into January. Our suggestion is to vote and help to create more certainty in an election that threatens to be uncertain.

If we believe that markets could be riskier in the near-term, why not hold cash or load up on those handful of stocks that have most recently done extremely well? Despite our previously stated concerns, since no one knows what the market will do in the short run, historically the most successful option has been staying the course and staying invested in a globally diversified portfolio of stocks and bonds. It is time in the market, not market timing that generally leads to better outcomes.

One final thought to ponder. This year the investors have withdrawn $242 Billion from stock mutual funds and ETFs. Over the last ten years, the year subsequent to a large withdrawal from the stock market has been very favorable. As such, we remain committed to the long haul and focusing on long-term goals, not taking our eyes off the ball for the headline of the moment. We hope that you can do so as well. Take time for yourselves and your loved ones, to regain your composure and peace of mind during this unsettling time.

Thank you for your continued confidence in our work.

The views represented in this commentary are not meant to be construed as advice, testimonial or condemnation of any specific sector or holding. Investors cannot invest directly in an index. Unmanaged indexes do not reflect management fees and transaction costs that are associated with some investments. Past performance is no guarantee of future results. To discuss any matters in more detail, please contact your financial advisor.

There are no assurance that the content made reference to directly or indirectly in this Market Commentary will be profitable, or suitable for your individual situation, or prove successful. Due to various factors, including changing conditions, the content is only reflective of current opinions or positions and is subject to change at any time and without notice. Moreover, you should not assume that this Market Commentary serves as the receipt of, or as a substitute for, personalized investment advice from Affiance Financial. Please remember to contact Affiance Financial, if there are any changes in your personal/financial situation or investment objectives.