In the year that has been so improbable, the impossible has happened.

In this commentary, I will not revisit the numerous “improbable” events that have happened this year, because many were too real and continue to be emotional and disturbing.   But, suffice it to say that what we thought may have been “impossible” actually did happen.  And, I am confident that I speak for all of us when I say we need to have 2020 over!  It is a year we don’t want to continue, duplicate or much less remember in our lives.

Instead, I will focus on the markets and economy today, and where we might be headed.

The Markets and Economy:

  • Despite the “garden variety” pullback of 7% from September 2, 2020 to September 8, 2020, the markets continue to advance even with the increased amount of volatility.  In my opinion, this will continue.  Markets should trend upwards, but we’ll have some of those scary days and weeks.
  • The recent pullback was not surprising because the S&P 500 had advanced 33% from its low point on March 23rd through August 23rd, led primarily by the technology sector.
    • In fact, the S&P 500 return for the month of August was the best August return in the history of the market!
    • Similarly, the NASDAQ posted a correction of 10% in just four trading days from September 1st through September 4th.
  • Many of you have asked why the market has advanced at the pace it has since the March 23rd low?
    • Very simply, the market is always looking forward 12 to 15 months and not typically at the past – even the recent past.
    • Even though a full economic recovery may not occur until late 2021 or even in to 2022, the market believes the economy will continue to move towards a more normal or stable environment in the next 12 to 15 months.
    • And, unlike the 2008 global financial crisis that seemed to impact every sector of the investment landscape, this market has been more “selective.” Certain industries, such as travel, entertainment and hospitality may never come back to their pre-Covid numbers. But, other sectors, like online shopping, essential goods (Publix, Kroger, Target) and, especially, technology, are killing it in this market. So, opportunities still exist – they’re just not the same as they may have been a year or two ago.
  • What concerns me?  And, what do we need to watch for?
    • Layoffs have declined, but, unfortunately, after a few strong months of new jobs being created, hiring is stagnated. This can be a problem if it persists and could very well slow down the recovery.  It is a key indicator that we keep a close eye on.
    • Plus, I honestly believe that the focus for sustainable recovery must be on those who were hardest hit financially by the pandemic - the hourly/lower income workers.  Because we need to get these folks back to work.
    •  
    • But, this is can be a huge hurdle.  Based on the COVID financial relief package and the extra unemployment benefits many received, there was an unintended consequence – and that was a financial disincentive from even being called back to their former job.  For many people, they could make more money NOT working! So many of these workers had jobs in service-related industries such as restaurants, leisure, travel, entertainment or the small “Mom & Pop” coffee shops or dry cleaner businesses located in a lobby of an office building.  They all represent a significant percentage of this economy.
      • This is affecting consumer confidence that is still near or below pre-pandemic lows, despite business investment that is near or above pre-pandemic lows.
      • Unfortunately, business thrives on consumer confidence.
    • I see two events that probably need to happen to address this concern:
      1. Additional Government assistance, but not so much as to incentivize workers NOT to seek employment again.
      2. The economy continuing to open as local officials deem it safe to do.
      • Both steps will allow those most financially impacted by the virus to earn and spend money, which will increase consumer confidence.
      • Conversely, those who were less impacted by the virus are pretty much back to work full time, even though it very well may be remotely for now.

Where We Might Be Headed:

  • When it comes to the virus, the markets and the economy are not “falling off the cliff.”  We are making progress, and have pretty much come back to pre-pandemic levels.
  • Many of you may be wondering about the election.  News outlets and financial wizards are already chiming in.  But, consider the facts:
    • Historically, overall market performance is less impacted by who wins the election than people think, even if one party controls all three branches of the Government.
    • This brings me to this PDF that shows the S&P 500 performance during presidential cycles that date back to FDR/Truman through Trump’s first term, along with this blog post that Brad McMillin, Commonwealth’s Chief Investment Officer posted about this same topic.
    • I found both very enlightening and I wanted to share them with you.

Finally, please understand that the sky is not falling . . . nor, will is it likely to completely cave in regardless of who inhabits the residence at 1600 Pennsylvania Avenue.  We will get through this together . . . and, maybe the best news of all . . . is that we’re less than two months away from the end of 2020!

Certain sections of this commentary contain forward-looking statements that are based on my reasonable expectations, estimates, projections, and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. All indices are unmanaged and are not available for direct investment by the public. Past performance is not indicative of future results. The S&P 500 is based on the average performance of the 500 industrial stocks monitored by Standard & Poor’s. The Nasdaq Composite Index measures the performance of all issues listed in the Nasdaq Stock Market, except for rights, warrants, units, and convertible debentures.

That quote came from legendary Los Angeles Dodgers’ announcer, Vin Scully, on October 15, 1988, after Kirk Gibson hit a walk-off, game-winning home run in Game 1 of the World Series.  As much as that one swing of the bat was so electrifying for the sports world, the quote remains true today, but for far different reasons that have impacted our lives in 2020.