Third Quarter Market Review

The third quarter of 2020 supported both the bullish and the bearish case for the markets and left investors unclear as to where the fourth quarter might head.  The bulls were firmly in control in July and August as U.S. stock markets achieved multiple record highs after the best August performance in over three decades.  The strong rally from the March lows seemed unstoppable as most indices moved into positive territory for the year.  Bulls were energized by:

  • Stronger than expected employment results
  • Strength from big technology in the post COVID-19 economy
  • Monetary support from central banks and the hope of additional fiscal stimulus
  • Better than expected corporate earnings with above consensus forward guidance
  • Prospects for an effective vaccine

The bears gained control in September.  A 10% market correction from the August highs came quickly.  The high flying technology sector with their lofty valuations fell back to the pack while forgotten value plays like Deere, Caterpillar, and Coca-Cola showed signs of life.  The bears’ point of view is supported by:

  • Fiscal and monetary support for the economy has likely peaked
  • Unemployment numbers will remain elevated as small business struggles continue
  • Third quarter earnings season must deliver on expanded expectations
  • Stock valuations are over extended
  • Mounting fiscal deficits are a legitimate concern

Volatility spiked in September, but from a total return standpoint most assets posted positive results in the quarter.   A diversified portfolio invested in the S&P 500, international stocks, U.S. bonds, and gold individually returned 8.9%, 4.8%, 0.6%, and 13.3% in the third quarter.  These same assets over the trailing twelve months produced returns of 15.2%, 0.5%, 7.0%, and 28.1%.  Considering the effects of the pandemic and the impact it had on the economy, these are outstanding outcomes.  The patient investor has been rewarded for staying calm during the storm.

While stocks have provided investors with a thrill ride, the bond market has proven to be a safe haven.  The U.S. Treasury yield curve was basically unchanged throughout the third quarter.  The yield on the 2-year U.S. Treasury note fell 3 basis points to yield 0.13% at quarter end.  At the longer end of the yield curve, the 10-year note and the 30-year U.S. Treasury bond rose 3 and 5 basis points respectively to yield 0.69% and 1.46% at quarter end.  Credit spreads in both high yield and investment grade corporate debt narrowed meaningfully during the quarter.  Stable interest rates and tighter credit spreads kept mortgage rates low keeping the housing market strong.  The Fed will be on hold for the foreseeable future, so expect interest rates to remain subdued. 

This year can best be described as unpredictable.  The pandemic has changed the economy, business, work, school, and our lives in ways we never envisioned just nine months ago.  Looking ahead to the fourth quarter, it appears to be equally unpredictable.  Questions surrounding COVID-19, a vaccine, the election, the path of corporate earnings, additional fiscal stimulus, and economic growth will likely become clearer by year end.   

The financial markets are starting the fourth quarter on a relative high note providing investors a golden opportunity to reevaluate their portfolios and risk exposures.   It’s imperative to take a long-term balanced approach to your portfolio and it’s just as important to set your risk tolerance to comfortably weather future volatility.  Markets are moving at speeds we never thought possible and it is necessary to properly position your financial plan to stay invested for the long haul.


Posted on October 7, 2020 Read More

Markets Reach New Heights

The summer of 2020 is coming to a close, the pandemic lives on, and the election is now in the spotlight with both political conventions completed in unconventional fashion.  Major U.S. stock markets achieved multiple new all-time highs in August and now show positive returns for the year.  Investors appear to be looking right through the current wall of worry and focusing on where the economy can go versus the current state of the economy.  The markets seem to be brushing off the election, further impact from Covid-19, and national debt levels which have gone through the roof.  Despite all the concerns and distractions, the stock markets appear to defy gravity on a daily basis.

The economic numbers released in August cannot fully explain the strength exhibited in the monthly stock market returns.  The August unemployment report showed 1.8 million jobs added, in line with expectations.  The unemployment rate fell to 10.2%, down from the previous month’s 11.1% rate. In September, the unemployment rate is expected to return to single digits, but it is still a long way from the 3.5% rate just prior to the pandemic.  Inflation ticked higher for the month with the Consumer Price Index and the Producer Price Index each rising 0.6% on a month over month basis.  Retail sales and durable goods recorded increases of 3.6% and 11.2% respectively. 

The housing market has been the shining star in this cycle.  The work from home dynamic along with social unrest in major cities and low mortgage rates has created an enormous demand for single family homes.  The housing numbers in August were astounding:

  • Housing starts were up 22.6%
  • Existing home sales rose 24.7%
  • 5 million building permits were issued
  • Pending home sales increased 5.9% last month.

The pandemic has changed our lifestyles and behaviors in ways no one could have predicted just six months ago.

The stock market continues to move onward and upward logging the best August returns since 1984. Expectations for second quarter corporate earnings were low, but companies across the board reported better than expected results.  In the retail space; Target, Walmart and Best Buy reported excellent numbers sending their stocks to 52-week highs.  Federal Express and UPS were beneficiaries of the huge  e-commerce wave. Big technology names like Apple, Amazon and Facebook continue to lead the NASDAQ Composite to new heights now trading at levels nearing 12,000.  The S&P 500 is also trading at all-time highs with the five largest companies in the index (Apple, Microsoft, Amazon, Facebook and Alphabet) now representing over 20% of the index.  The NASDAQ Composite returned 9.7% in August followed by the Dow Jones Industrial Average up 7.9% and the S&P 500 posted gains of 7.2% in the month.  International stocks also had a profitable month with international developed stock markets rising 5.1% and emerging markets adding 2.2% in August. 

The U.S. Treasury yield curve steepened in August as the short end of the curve is in a Federal Reserve induced lock down. This may not be the start of another seven-year zero interest policy by the Fed, but it could easily last for the next four years.  The long-end of the yield curve is beginning to feel the pressure from mounting federal deficits.  In August, the 2-year U.S. Treasury note rose 3 basis points to yield 0.14% at month end.  At the longer end of the yield curve, 10-year note and the 30-year U.S. Treasury bond made a significant move to higher interest rates.  Interest rates on the 10-year and 30-year rose 17 and 29 basis points respectively bringing their month end yield to 0.72% and 1.49%.  Mortgage rates remain low helping to sustain the strong housing market.  Credit spreads in both high yield and investment grade corporate debt narrowed marginally during the month. 

Markets will likely be volatile as we head into the unknown of the November elections.  The economic policies emanating from the two parties are vastly different and will impact both the economy and the markets well beyond 2020.  The path of the pandemic will also influence business.  Large corporations, like those in the S&P 500, are successfully managing their way through the pandemic while small businesses are taking the brunt of the storm. Collectively, small business employs a large percent of the country and as more small businesses permanently close, the employment rate will be negatively affected. 

The past eight months is a perfect example of the market’s ability to whipsaw unsuspecting investors.  Investors need to take a long-term balanced approach to their portfolio and overall financial plan.  Markets move at speeds we never thought possible and it is imperative to position your investment portfolio at a risk level consistent with your investment goal and objectives.  Set your course and stay your course for the long haul. 


To expand on these Market Commentaries or to discuss any of our investment portfolios, please do not hesitate to reach out to us at 775-674-2222

Posted on September 1, 2020 Read More

Pandemic: Round Two

Virus cases in the U.S. surged in July as cases now top 4.3 million.  This number has doubled in just the past six weeks.  This resurgence in virus cases has caused the economy to lose some momentum from improvements made in May and June when restrictions were first being relaxed.  The spike in cases has slowed reopening plans and required some industries to scale back their forward revenue/profit guidance. The airline industry for one has been forced to reduce their flight schedules once again and are now looking for ways to permanently downsize their workforce to save money.  While some industries are in the fight for their long-term survival other industries like technology, pharmaceuticals, and consumer staple companies have been thriving in the pandemic.

Despite the coronavirus’ impact on the economy, business, work, consumer spending, and our lifestyles; the stock and bond markets have exceeded most expectations since the March market crash.  It is important to understand and appreciate the positive impact fiscal and monetary actions has had on the markets, workers and consumers over the past five months.  Before Congress leaves for their next recess in early August, expect another round of fiscal stimulus.  A $1 trillion stimulus bill is currently being discussed which would include another $1,200 stimulus check to qualifying households.  Governmental assistance is a global event as many countries are desperately trying to avoid an extended recession.  Data below shows government’s record fiscal stimulus as a percentage of their GDP.  You can see the U.S. is leading the way in this regard, but everyone is participating.

In addition to government actions, global central banks are backstopping the markets with unprecedented accommodative monetary policies.  In the U.S., the Federal Reserve Bank has made liquidity a top priority making money readily available to banks and businesses.  This is evident by the further expansion of the Fed’s balance sheet over the past five months.  Prior to the 2008 recession the Fed balance was steady at the $800 billion level.  To save the banking system and cushion the impact of the recession, the Fed expanded their balance sheet to $4.5 trillion while keeping key short-term interest rates targeted at zero for seven years.  Just as the Fed was beginning to shrink their balance sheet and slowly raise interest rates, the coronavirus hit and the Fed returned interest rates to zero and expanded their balance sheet to a mind boggling $7.0 trillion.

For those wondering why the markets are performing as well as they are, these two charts speak volumes.

The economic numbers released in July showed some improvement, but there is still a long road back to the 2019 economy. The July unemployment report showed 4.8 million jobs added, well above expectations.  The unemployment rate stands in double digits at 11.1%, though much improved from the 14.7% April number and a far cry from the December 3.5% unemployment rate. The Purchasing Managers Index rebounded nicely to 47.9 (June’s number reported in July) from 37.5 in the previous monthly report.  The reading is still below 50 which signals contraction.  Inflation is still well under control with core CPI running at 1.2% year over year.  The University of Michigan Consumer Sentiment Index dipped to 73.9 reflecting the angst among consumers in this uncertain environment.  This number hovered around 100 before the virus and now sits at a multi-year low.  As expected, second quarter GDP annualized quarter over quarter number was reported down 32.9%.  This was the worst quarterly economic decline ever.   

Despite all the current news and anxiety regarding the resurgence of the pandemic, the stock market continues to move onward and upward.  Big technology names have provided the leadership with the NASDAQ composite trading at record levels north of 10,000.  Names like Amazon, Apple, Tesla, Netflix and Facebook find new all-time highs on a regular basis.  The NASDAQ returned 6.9% in July followed by the S&P 500 up 5.6% and the Dow Jones Industrial Average posted gains of 2.5% in the month.  International stocks also had a profitable month with international developed stock markets rising 2.3% and emerging markets adding an impressive 8.9% in the past three months.  Gold also had a big month crossing the $2,000 an ounce barrier as the U.S. dollar weakened.       

The bond market is in a period of calm and it may stay this way for an extended period of time.  The Federal Reserve acted quickly to move key short-term interest rates back to zero back in March.  They stated publicly that the zero interest rate policy would likely be in place until 2024.  The U.S. Treasury yield curve appears to be in a lockdown of its own with rates lower again in the past month.  The 2-year U.S. Treasury note declined 5 basis points to yield just 0.11% at month end.  At the longer end of the yield curve, 10-year note fell 11 basis points to yield 0.55% while the 30-year U.S. Treasury bond had a significant decline of 21 basis points to yield just 1.20% at month end.  Mortgage rates are now at all-time lows helping support the housing market.  Both high yield and investment grade corporate debt saw a continued narrowing of credit spreads which explains their strong relative performance this month. 

Forecasting the market is challenging in normal economic times.  In these extraordinary times of viruses, social unrest, China tensions and a quickly approaching presidential election, predicting the market’s next move is basically impossible.  For the glass half full crowd, you can gain comfort from the aggressive fiscal and monetary policies in place and the possibility of an effective virus vaccine sometime in 2021.  For the pessimists out there, you likely see the glass as completely empty.  The negative news can feel overwhelming at times, but remember every time period has its wall of worry to climb.  During this period of uncertainty it may seem like the wall is insurmountable, but only because it is the wall directly in front of us.  The market will climb this current wall of worry and then start the next climb over new worries once today’s concerns are behind us.  Instead of focusing on where the market may or may not be headed, stay focused on your investment goals, objectives and risk tolerance.  There you have control.  The markets will take care of themselves over time.

To expand on these Market Commentaries or to discuss any of our investment portfolios, please do not hesitate to reach out to us at 775-674-2222.

Posted on August 5, 2020 Read More
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