Market Commentary: October 2020

Recession? What recession? Like a magic trick or a hologram where now you see it (on Main Street) and now you do not (on Wall Street and in your portfolio), this is a very confusing time depending on your angle of view. While unemployment has fallen from the pandemic high of 14.7% to a still difficult 7.9%, stock markets are touching new highs and housing is booming. While four in 10 Americans say they would struggle to come up with $400 in a pinch, they have been able to reduce their credit card debt and home loans every month since March. Permeating this multi-dimensional confusing recession is a very acute level of anxiety, sadness, and fatigue over all that is happening even beyond the economics like the historic fires, the presidential election, and of course the pandemic itself.

Amid this strange time can the stock market optimism last? There are risks, of course. However, there are also reasons for optimism, which we discuss below. But first, let’s review the figures for the quarter.

Strength in both stocks and bonds continued for the second quarter in a row. U.S. stock market indexes fully regained their lost ground and started to hit new highs by late August, only five months after the dramatic downturn. Emerging Markets led the way as China marked the only major global economy to record economic expansion this year. U.S. stocks were a close second also achieving above 9% for the quarter. [Another hologram exists here too with just 10 stocks in the S&P 500 responsible for 28% of the index’s return.] Both U.S. and Global Bonds provided a small but stable return for the quarter.

The last two recessions were followed by “jobless recoveries” in which it took years for unemployment to come back down. Despite the optimism in the stock markets, we remain very cautious about the length and depth of this recession; we do not think it is clear sailing ahead. Instead, we have prepared your portfolio for another downturn and for the recovery to take much longer. We are watching closely the possibility of more fiscal relief, the resurgence in coronavirus cases which could seriously limit growth, and the timing for a viable and widely distributed vaccine. Unlike previous cycles where the Federal Reserve has preemptively raised rates ahead of inflation, it has chosen to do the opposite this time. TheFed has adopted a higher inflation target which is supportive for growth. The hope is that the unemployment rate falls before inflation picks up and rates must be increased to keep rising inflation in check. This too could impact our recommendations for your investments. As is often the case in recessions, the pandemic has prompted many companies to accelerate shifts that were already underway. When the economy does get back to full strength, many jobs will no longer exist forcing workers to find other types of work. Historically, these kinds of readjustments take time.