Market Update Q3 2020
Covid-19 and the Road Ahead Continued
US Equity markets have had a bumpy road because of economic hardships around the world, caused by the Covid-19 virus and a global economic shutdown.
The technology heavy NASDAQ attempts to capture new highs after falling during most of September. The S&P 500 has just scraped out a positive return YTD with much volatility, and the DOW is struggling to get to even for the year. International Markets have attempted to inch their way back to where they started in 2020.
Central Banks continued to support easy monetary policies around the world. Bond yields remain at historical lows.
Cities and employers continue to open with measured approaches. Masks, sanitizing and social distancing are the new normal.
The US real estate market is hot.
China trade negotiations, still an issue.
The Presidential election battle is on. The markets have not chosen a side, consequences to the prospect of change have not been seen. It is said in the financial realm, “Markets do not like change.” We are keeping our eye on the political underpinnings that would impact the markets in either direction.
Early in the quarter, markets continued to rebound off the late March Covid-19 correction lows. The financial markets moved forward on bright spots in the economy. Growth stocks continue to be the darling of this correction. The technology, telecommunication, and consumer discretionary sectors of the economy have had a positive impact, pushing the markets forward, and counter acting the fastest bear market in history. However, we are uncertain about sustainability of the lightning fast correction in the financial markets. We move cautiously with the concern that market valuations are not sustainable. We are looking for valuations to normalize with a move to true value.
Currently, we have accommodative central banks (low interest rates) and government stimulus (CARES Act and beyond) keeping the economy and financial markets moving in a positive direction, to avoid a W shaped recovery.
Cities, and the employers within them, are slow to open. Workers have not returned to full employment. The trend is stay home, work from home, learn from home, and social distance. Many employers have downsized, and the remaining workforce has not returned to traditional workspaces. The impact of this rolls through the economy, from falling automobile sales to restaurant closures. The long-term fallout may have the markets begin to trend in line with the reality of the economic slowdown.
We have seen a weakening in purchasing power of the consumer, which may suggest that the momentum of the consumer discretionary sector rebound may not be sustainable. Economic activity seen in this sector over the past few months is fading. Comments from the Federal Reserve and Treasury point to a need for additional government stimulus to keep the consumer buying, and spur continued growth in the economy. We believe this is a dangerous path to follow. It looks like the government will continue to spend to keep the consumer alive to head off turmoil in the economy. Our concern is that this is not sustainable for the long term.
The US residential real estate market is running hot with low interest rates, low inventory, high prices, and elevated demand as people move to geographically desirable locations to cope with the call to stay home. Our concern is the housing market environment is not sustainable.
Still looming are US and China trade issues that have not been resolved but swept under the rug from public awareness. Tension between both countries is escalating with geopolitical disagreements exposing themselves.
We remain cautious in the markets with uncertainty about the economy’s ability to grow without government spending intervention, and the future impact of the Covid-19. For these reasons, we decided to tactically overweight the cash position in all our portfolios this past quarter. We believe that by being patient, significant opportunities will present themselves to reenter the financial markets after the election results are finalized.
If you have any questions about how your portfolio is positioned, or how your personal financial circumstances could be impacted by the volatility we are expecting, please do not hesitate to give me a call.
Sincerely,
Scott Miller
Partner
