“No amount of sophistication is going to allay the fact that all of your knowledge is about the past and all your decisions are about the future.” — Howard Marks
Third Quarter Recap
Most global equity markets rose in the third quarter, while bonds remained little changed. U. S. stocks surged until early September when market-leading mega cap stocks such as Alphabet (Google), Apple, Netflix and Facebook corrected sharply, resulting in a down month for the indices. Commodities appreciated along with precious metals such as gold, copper and other industrial metals, while oil prices gave up earlier gains. The American dollar sold off to levels last seen in early 2018
“Look! A buy signal.”
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After plunging 31% in the second quarter, real GDP growth spurted in late spring and summer as employment, consumer spending, consumer confidence and housing all rose sharply.
A resurgence in Covid-19 cases in the Sunbelt states combined with termination of part of the CARES Act passed by Congress caused progress to moderate. Negotiations over a sequel “Phase 4” bill stalled in Congress, with executives from hard hit sectors such as airlines and hospitality warning of large layoffs.
Many small businesses continued to struggle, lacking access to capital markets shared by bigger companies. Due largely to the pandemic, the country currently has a very bifurcated or two-speed economy. Areas such as housing, technology and many large companies are prospering while others are in deep trouble. Although Wall Street reflects the direction that Main Street will be heading in the next few months, the absolute level of each at the moment is quite different.
Meanwhile, the Federal Reserve Bank formally switched its preemptive stance on inflation to a more reactive strategy, promising to raise interest rates only after the inflation rate exceeds 2% on a sustainable basis and after the economy is operating at full employment. In essence, the inflation focus of the last several decades has flipped to employment first — then inflation. This reflects a failure by the Fed to bring inflation up to a sustainable 2% level after the Financial Crisis of 2008.
Covid-19 Developments and the Upcoming Election
Research continues unceasingly on a Coronavirus vaccine, with numerous companies and laboratories in Phase 3 (the most advanced) trials. The earliest results are optimistically due in a month or two. Obviously, a successful vaccine would be a game changer and mark the beginning of the end to the pandemic. This comes as the first full cold season of the virus is upon us, when people mostly gather indoors and the pathogen has the greatest opportunity to spread.
Schools have started to reopen, bringing the possibility of children, though generally less affected by COVID 19 than adults, passing on the infection to their parents and grandparents. Until an effective vaccine is found, the virus won’t be able to be fully controlled, but massive outbreaks can be avoided through the consistent use of face masks, proper social distancing and contact tracing. Testing procedures have also improved dramatically since February.
The November general election looms as a source of uncertainty. In particular, the prospect of a delayed and contested result has concerned investors, similar to the “Florida hanging chads” in the Bush-Gore election of 2000. In recent days, however, polls have indicated a larger lead for the Democratic challenger, former Vice President Biden. Additionally, a number of important battleground states have taken measures to speed up the processing of mail-in ballots, allowing some results to be known on Election Night.
Control of the Senate is also at stake, with Republicans currently holding only a small majority. Of course, there is still about a month left before the election, and pollsters have been wrong before, as the outcome in 2016 has shown us. As has been the case time after time, however, the markets are more concerned about certainty and a definite resolution rather than who wins.
The Outlook
- The economy would be helped by more fiscal stimulus from Congress, which may not occur until January.
- The country has reclaimed about half of the jobs lost this year. Going forward, the task will be to prevent those still without work from becoming longer term (more than six months) unemployed, which decreases their chances of finding jobs without extensive retraining. Fortunately, continued support from the Fed should keep recovery going, even if it is at a slower pace.
- As mentioned earlier, a Covid-19 vaccine would be a huge positive development for everyone.
- We continue to have a moderate tilt towards equities, recognizing that because of the bifurcated economy, individual sector and stock selection will be critical, more so than it has been for a long time.
- Bonds have a ceiling on returns due to Fed policy, but still offer a buffer to stocks. We also continue to maintain our position in gold, which has done very well during this turbulent year.