APW Investment Committee Q4 2020 Commentary
The third quarter of 2020 continued the US equity rally started after the bottom in March. The S&P 500 reached break even for the year and even achieving a new all-time high close price of 3,580.84 on September 2nd.
Continuous Federal Reserve action to maintain financial market liquidity supported all asset prices during the quarter. In particular, high growth technology stocks experienced a surge in September reminiscent of the late Nineties “dotcom” boom driving overall market price-to-earnings ratios to twenty plus year highs.
sectors due to Coronavirus – Energy, Financials, Industrials, Real Estate, and Utilities – while employing millions of people, only represent 25.7% of the index. Technology by itself represents 28.2% of the index. Other areas such as Consumer Discretionary, Communication Services, Health Care, Consumer Staples and Materials that make up the rest of the index are all doing well (positive to very positive for the year). This is the reason that the overall market (i.e. S&P 500) can rise while the economic data continues to be extremely challenged – 25% of a bad number plus 75% of a good number is still a good number!
International stock markets have rebounded as well although not as much as the US. The biggest development in the quarter is the continued decline in the US dollar relative to a basket of foreign currencies (about 8% from the recent peak in March). This is supportive of international stocks for US investors.
On the fixed income side the yield on the 10 year US Treasury note stayed flat during the period. A slight rise in the first week of October puts the yield at 0.76% as of this writing vs. 0.69% on July 1. During the quarter the Federal Reserve Chairperson, Jerome Powell gave speeches that expressed a strong likelihood that the Federal Funds rate
would be kept at zero through 2023. While long-term rates (10 year maturities and greater) could start to rise if the markets see inflation, Powell said they “do not see inflation rising to its 2% target until 2023.”
APW models reflected the strong gains in the stock market with the equity sleeve in our models rising over 12% during the period and the fixed income taxable sleeve growing slightly less than 2%.
In our last market commentary, we expressed a somewhat optimistic outlook for the third quarter with the belief that Congress would (in an election year) avail itself of the chance to shower voters with stimulus money. While the stock market did in fact continue to rise, the stimulus never materialized. With the election less than 30 days away it seems that any pre-vote stimulus will be small in nature if at all. Nonetheless, we maintain our bias towards upward equity prices. There are three potentially significant catalysts in the fourth quarter.
A few other potentially positive pieces of news include strong corporate earnings and/or earnings outlooks for 2021 and general improvement in the tone and tenor of trade relations with China post-election.
With these as the back drop we, like everyone, share a few common concerns – that the election will be vigorously contested well into January, that Coronavirus cases dramatically increase in the cold weather, and/or that vaccine test outcomes are poor. Any of these could derail stocks. Nonetheless, with the Federal Reserve providing unlimited liquidity, it would seem that the old adage, “Don’t fight the Fed” is still the truest of all investing axioms.
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