Third Quarter 2020 Review & Outlook

"The best way to measure your investing success is not by whether you're beating the market, but by whether you've put in place a financial plan and a behavioral discipline that are likely to get you where you want to go." - Benjamin Graham

Review

During July and August, the stock market continued its upward surge to new all-time highs. However, in September the market retreated from its lofty levels with a 10% correction. Nevertheless, the Dow Jones Industrial Average and S&P 500 Index were both up over 7% during the third quarter, and attained the best two-quarter performance since 2009 with both indexes up more than 26% since the end of March. The technology heavy Nasdaq Composite Index continues to be the standout performer in 2020. The Nasdaq was up more than 11% during the third quarter and over 45% during the past six months, which is the best performance for two quarters since the dot-com era in 2000. The best performing sector during the third quarter was Consumer Discretionary, up over 15%. Other strong performing sectors were Materials, Industrials, and Technology. The worst performing sector was Energy at down over 18%.

There are several reasons that we detailed in our Second Quarter 2020 Review & Outlook as to why the stock market has rebounded so strongly from its low point in March.The following important drivers of the rebound continue to hold true:

  1. Strong monetary support from the Federal Reserve and Congress. Negotiations are ongoing in Congress over a second coronavirus stimulus package.
  2. The U.S. economy is poised to bounce back once the pandemic is under control.
  3. Some of the largest technology companies in the S&P 500 have increased their market share and profits during the pandemic.
  4. Continuing positive momentum towards a vaccine this year or early 2021.
  5. Consumer spending has increased while hiring has increased for four consecutive month.

Election 2020

Investors are concerned about how the stock market will react based on which party wins the White House in November.We realize it is very hard to maintain a long-term perspective due to the strong feelings invoked by politics on both sides of the aisle. We have seen many investors speculate if they should liquidate their investments and wait for the election outcome before making long-term decisions.Investors pondered similar questions back in March during the depths of the market sell-off.We have since been reminded why it is a mistake to time the market by the fact that we experienced the strongest five-month stretch from April through August in 82 years.To put that in perspective, Warren Buffett, one of the greatest investors of all time and currently 90 years old, was only 8 years old the last time we saw that level of market growth over five months. We are confident it would also be a mistake to adopt a market timing strategy at this time as well.

Regarding the impact of elections on the stock market, we caution investors from putting too much emphasis on election results. Ultimately, other factors such as monetary decisions by the Federal Reserve, corporate earnings, and overall economic growth have a more profound impact on the stock market than politicians. From a political perspective, stock market performance does not always line up with expectations. Forbes published an article in July of this year looking at how the stock market performed under every President since World War II. The article notes, "From 1952 through June 2020, annualized real stock market returns under Democrats have been 10.6% compared with 4.8% for Republicans."

There is a strong case for remaining invested regardless of the election outcome. In a recent report published by American Funds Capital Group, the following argument was made against selling stocks heading into the election: "Consider the historical performance of the Standard & Poor's 500 Composite Index over the past eight decades. In 18 of 19 presidential elections, a hypothetical $10,000 investment made at the beginning of each election year would have gained value 10 years later. That's regardless of which party's candidate won. In 15 of those 10-year periods, a $10,000 investment would have more than doubled."

Predictions for the stock market based on Presidential election outcomes can often be wrong, as evidenced by the following two examples:

  1. Growth stocks have continued to outperform value stocks during President Trump's term. The conventional wisdom when he was elected in 2016 was his policies would accelerate growth, interest rates would rise, the yield curve would steepen, and therefore value stocks would start to outperform. This has not happened during his term.
  2. When President Obama was elected in 2008, prognosticators thought it would be wise to avoid health care stocks due to the likely passage of the Affordable Care Act. However, according to the Wall Street Journal, the S&P Health Care Index has more than tripled since 2010.


Outlook

The Federal Reserve continues to pump trillions of dollars into the economy. The Fed has now expanded its balance sheet from $4.1 trillion at the beginning of 2020 to more than $7 trillion, and has purchased not only Treasury bonds but also mortgage backed securities, investment grade and high yield bonds. These purchases have helped push interest rates to near zero. Based on the commentary provided at the last Federal Reserve meeting in September, the Fed is expected to leave short term rates near zero until 2023 considering the 7.9% unemployment rate and the drop in personal income.

Here are several reasons why we can be positive about the trajectory of the stock market:

  1. The economy continues to strengthen. The Gross Domestic Product (GDP) is projected to reach 30-35% for the latest quarter according to the Atlanta Federal Reserve and Goldman Sachs. Retail sales have already surpassed their peak from before the pandemic, and the housing market continues to boom.
  2. Momentum can be powerful. According to LPL Financial, "When the S&P 500 has been up five straight months, as it was in April through August, stocks historically have kept going higher. In fact, the last 26 times the Index rose for five straight months, it was higher a year later 25 out of 26 times."
  3. Corporate earnings estimates for 2021 are increasing. Earnings estimates rose during the second quarter and have continued to climb higher. Goldman Sachs recently projected the earnings per share for the S&P 500 to be $130/share for 2020 and $170/share for 2021, which would be a 30% increase.


The average annual return of the S&P 500 has been approximately 11% since the end of World War II even though we have suffered through wars, impeachments, natural tragedies, etc. These returns were achieved during Democrat and Republican administrations. While no one knows how the election will turn out this year, we are confident that investors should continue to follow their financial plan and remain committed to their long-term investment strategy.

Sincerely,

Marietta Wealth Management, LLC