Investment Update: October 9, 2020 - Reflecting on 2020 and a Look Ahead at the MarketsSubmitted by Affinity Capital on October 9th, 2020
As we close the third quarter of 2020 and enter a pivotal fourth quarter, we’d like to reflect on this year, not just with the Covid19 pandemic and other news that has created one of the most unsettling periods of time in our nation. We also look forward to the year end and the effects of a Presidential election. Any timeline for the development of a safe and effective vaccine will greatly impact the markets as well.
This is Part One of our lookback and will reflect a month-by-month review of the year while highlighting previous Affinity Capital Investment Updates from that period. Part Two, covering our thoughts going forward, will be published next week.
As 2020 began, we viewed the markets as overvalued. Many of the common metrics used to value the markets were 10% or more above their 25-year averages, which is normal for a rising market. The markets react to events and news which act as catalysts to spur selling and bring the markets back in line with historic valuation measures.
The January markets barely reacted to a clash with Iran or the start of Presidential impeachment hearings. On January 9th, the World Health Organization reported 59 cases of a mysterious virus limited to Wuhan, China. The Centers for Disease Control confirms that the first U.S. case of Covid19 was on January 21st.
From the Affinity Capital Investment Update on January 29, 2020:
“The Coronavirus may be a catalyst for selling”.
On February 3rd, the U.S. declared a Public Health Emergency due to the Covid19 pandemic, and on February 5th the presidential impeachment hearings ended in acquittal. The markets had little reaction to either event. Yet on February 19th, the S&P 500 and NASDAQ Composite stock-market indexes hit all-time closing highs. As Covid19 continued to spread around the world, the markets began a sharp descent on February 24th.
Affinity Capital Investment Update February 25:
… While economic data remains strong, a pullback is not unexpected. … We also note that going forward … there is a valid economic concern to factory closings, reduced travel and hotel bookings and many other economic generators….
As we entered March, Covid19 dominated every aspect of our lives as nations and entire economies closed. The Coronavirus Aid, Relief, and Economic Security Act was signed and provided $2 trillion to help households, small businesses, state and local governments and corporations weather the crisis. The Federal Reserve cut the federal funds rate to zero and poured $1.6 trillion into financial markets. A further catalyst for the stock market downturn was a sell-off in the oil markets sending the price of oil down 25% to $30.95 per barrel when Russia walked out on talks with Saudi Arabia regarding a new agreement on oil pricing and production cuts. The market decline accelerated.
Affinity Capital Investment Update March 9:
There is an old saying in the markets that says, ‘Panic is not a strategy.’
We at Affinity Capital have taken measured steps in the last thirty days to position our portfolios for this market weakness. However, we do not want to be out of position for a market recovery. Not if, but when, it occurs.
We are long-term investors and therefore encourage you to take a break from play by play cable television whose primary goal is to heighten emotions and sell advertising. … History is full of periods of crisis as well as recovery. This too shall pass.
Affinity Capital Investment Update March 9:
Panic is irrational and short-term which makes it difficult to analyze the markets rationally with a mid to long-term outlook. As Portfolio Managers our role is to maintain an understanding of investor psychology including panic selling and computer algorithms feeding our markets as well as anticipating the cycle of an event. This moment in history – the Coronavirus and its effect on the markets had a beginning, it will have a middle or a peak and it will have an end. Our economy and our nation are strong enough to weather this storm.
Regardless, we strongly believe that when the markets recover, and they will, we can achieve these levels and more. We are not trying to pick a bottom but simply execute a plan of action to weather the storm.
Affinity Capital Investment Update March 24:
We believe … there will be a recession … However, as of today, we think it could be shorter and not as deep as a normally occurring business cycle recession.
As you have seen from the many trade confirmations you have received, we have rebalanced often during this decline. While this has created more equity exposure during the more recent declines, it has positioned us well for the market recovery.
The month of April saw the Federal Reserve continue to apply some of the most aggressive emergency powers ever to stabilize the economy. Energy prices plunged, spurred by the Russia/Saudi price war, which led to a technical anomaly in the energy market driving oil prices to ”zero”. The nation and the markets continue to struggle with stay at home orders and economy in limbo. As the $2 trillion dollars in government stimulus reached individuals and businesses, the Dow had its best April in 82 years.
Affinity Capital Investment Update April 2:
A concern is when social distancing relaxes and businesses start to reopen, a second outbreak may occur which will impact the economy once again.
Government will look to further economic stimulus to aid our economy. While these short-term measures will provide support, the longer-term impact on our national debt should not be overlooked.
Affinity Capital Investment Update April 22:
The standalone headline touting the ‘price of oil is negative’ is simplistic and sensationalized. There is much more to the issue….
We hope to lessen the feelings of impending doom and panic that headlines may invoke, but we do not wish to diminish the severity of the problems facing the energy industry.
The markets continued their strong recovery dominated by the “FAANG” technology stocks, Facebook, Amazon, Apple, Netflix, and Google. The massive government stimulus provided the anticipated support to the economy. The federal budget deficit was expected to hit $3.7 trillion by the end of fiscal year 2020, which is more than four times the current annual deficit. The Congressional Budget Office forecasted the national debt will eclipse the annual economic output of the United States in 2020, with the ratio of federal debt to GDP rising to 101%. In addition, the Federal Reserve balance sheet rose 70% to over $7 trillion dollars. Further stimulus is still needed, and concerns grow over the unintended consequences to long-term monetary policy and the economy.
Affinity Capital Investment Update May29:
The differing regional COVID statistics will drive business re-opening strategies. In addition, the judgments of local, state, and federal officials will certainly affect coordination of a full economic recovery.
The markets and our portfolios will always fluctuate. Our focus should be on our personal life goals and how proper long-term planning can help achieve those goals. We have managed portfolios throughout many historic events and as long as you believe in American business and our workers, your investing will be successful. We have always recovered.
After some leveling of Covid19 cases in May, the month of June saw a rise in cases spurring concerns over the timeline for re-opening the economy. The markets finished the quarter with some of the largest gains in decades, with gold prices reaching record highs. The Federal Reserve began buying individual corporate bonds to help stabilize yields. After the loss of 20 million jobs in April due to the Covid lockdown, 4.8 million jobs were added in June. This is a positive development at the time, yet economic hardships are profound, and uncertainty reigned.
Affinity Capital Investment Update June 23:
The markets are focused on three major themes: The Rate of Covid-19 Case Growth, The Federal Reserve Legislative Economic Relief and The Strength of Corporate Profit Growth Over the Next 18 Months.
While COVID cases are increasing in some areas and declining in others, we may still be in the first wave of infection. Any resurgence would impact our re-emerging economy.
Many states and municipalities will limit how much of their economy will re-open until there is a vaccine and a vaccine with limited testing could be 6 to 12 months away. The pace of positive data will gradually slow.
The Federal Reserve suggests that interest rates will remain at or near zero through 2021. … they are committed to purchase corporate bonds in the secondary market. Legislative action taking shape includes a one trillion-dollar infrastructure package, extended unemployment benefits and another round of stimulus checks. A concern is the unintended consequences of massive long-term public debt or the impact of another negative economic event. Are we leaving ourselves an empty toolbox? …
… As of today, we do not foresee a re-test of the March lows however volatility will certainly remain.
Many of the CARES Act benefits and stimulus programs were beginning to expire while Congress continued negotiations on a new stimulus package. The Federal Reserve continued their aggressive support for the markets and economy. As year-to-date Covid cases rose to 4.5 million, pharmaceutical companies progressed in the production of a vaccines. The markets continued to rise again led by a handful of the largest technology stocks, with gold having a strong climb as well.
Affinity Capital Investment Update July 15:
American determination and ingenuity are ever-present in the search for COVID19 treatments and a vaccine. Unfortunately, the strain on our economy, workforce and especially small business will continue to create market difficulty. There will be a significant number of bankruptcies for businesses of all sizes. The massive government infusion into our economy has had significant success but we are concerned about the unintended long-term consequences to our credit markets. This is one reason we are avoiding most lower quality bond funds.
The yield on the 10-year U.S. Treasury Note appears to break its downtrend rising to 0.714% after a March low of 0.318%. While this rate is by all accounts miniscule, the increase is large on a percentage basis. We also note the rate is effectively negative relative to a 1.7% rate of inflation. The markets continue to rise as anticipation of an elusive new stimulus package. The Covid delayed Democratic and Republican conventions conclude with the nominations of Joe Biden and Donald Trump as their respective nominees. The election season officially begins. For August we are reaching into the archives for our Investment Update of October 2016 when we discussed the upcoming Presidential election.
"Indecision may or may not be the problem”
The markets hate indecision and while good news is obviously preferable, it is better to know bad news and decide a strategy going forward than to remain in limbo.
… since 1944, the performance of the Standard & Poor's 500-stock index from July 31 to Oct. 31 has a curious way of predicting the winner of the presidential election.
As with every prediction, take it with a giant grain of salt. If the S&P 500 record a positive return from July 31 to October 31, it signals the reelection of the party in power, while a decline suggests replacement… The two times the pattern did not hold were in 1968 and 1980, when influential third-party candidates were in the race. Note: Fun trivia, but don’t bank on it!
The major equity benchmarks experienced double-digit declines in the typically weak month of September. August and September are typically the weakest months of the year for stocks dating back to 1950. While economic data continued to improve from its depths earlier in the year the markets continued to seek clarity on further stimulus while also waiting to hear of a Covid19 vaccine. The death of Supreme Court Justice Ruth Bader Ginsburg added to the political divide in the country. The election now began to take center stage and market volatility increased.
Affinity Capital Investment Update September 4:
Our markets have had an impressive climb from their lows in March to new highs in the last week. It is a natural pattern for the markets to retreat as Wall Street takes profits after a big market move.
… Should this brief sell-off accelerate, a total short-term market decline in the Dow Jones Industrial Average of minus 6% to 10% would be a reasonable area to watch, and perhaps a minus 10% to 15% on the technology heavy Nasdaq.
So many times, the phrase ‘This time is different’ has been used in regard to the markets and the economy. Mark Twain said that “History doesn’t repeat itself, but it rhymes”. After a century of world wars, cold wars, disease, oil embargos, inflation, recession and differing political parties, … the markets have recovered, and they even reached historic highs just this year.
If you have lived a seasoned or long life, reflect on major periods or events in history when we were faced deep challenges. If you are young, ask a parent, grandparent, friend, or neighbor. Similar fears and uncertainty absolutely existed then as they do today. Over the breadth of history, the markets have always proved resilient.
As always, please feel free to reach out to us to discuss this information or if we may assist you in any.
Thank you for the opportunity to assist you and your family.