The third quarter of 2020 was again dominated by COVID-19 and its continued effect on our lives, the economy, and the markets. It feels like we’ve lived through a spike, a contraction, and a spike again in COVID-19 cases all since I penned the last commentary. However, speaking for myself and my family, we are trying to return to (some sense of) normal. My kids are back in school, we’ve taken a trip, and myself and others are back in the office. Of course, we do all this with masks on; we keep our distance and use hand sanitizer frequently. While all of the precautions can be annoying at times, it is an improvement over the lockdowns in March and April.
Stock markets around the world continued their recovery in the third quarter. The S&P 500 (a stock market index measuring performance of the largest 500 companies listed on stock exchanges in the U.S.) was up almost 9%. International and Small Cap Stocks, which suffered more significant losses during the pandemic than large company U.S. Stocks, were up nearly 8% and 6%, respectively. Strong third quarter returns have turned many of the major averages positive for the year. However, there are still considerable differences in returns between growth vs. value stocks, large vs. small company stocks, and U.S stocks vs. Non-U.S. stocks. As an example, Apple, Facebook, Amazon, Google (Alphabet), and Microsoft account for almost 25% of the S&P 500’s return. If you remove these five stocks from the index it turns negative for the year. The lesson to take from this example is always look beyond the headline numbers. While it is easy, and can be interesting, to quote returns when discussing the market, it is not always the best gauge of the economy’s strength. While the stock market has recovered for now, recovery in the overall economy is not as clear.
How companies fared during the pandemic very much depended on the industry in which they operate. Some sectors of the economy continue to experience significant headwinds, such as leisure and hospitality. Employing almost 17 million people in the United States, or just over 10% of the workforce, the unemployment rate for leisure and hospitality continues to hover around 19%. Industries such as hospitality (and others) and millions of individuals will likely need additional help to get through the pandemic. As a reminder, the U.S. is a consumer-driven economy. If the consumer doesn’t have money to spend, the economy will suffer. The nature of our economy drives our focus on employment.
To assist consumers, the government continues to work toward further stimulus. A government stimulus plan is complicated to pass at any time but weeks before an election adds immense complexity. The market seems to believe further stimulus will be passed. Should Washington fail to act, the impact on market expectations will likely turn negative. A discussion of the long-term fiscal effects of more government spending and increasing debt is a topic for another time, though we as a country will deal with it in the future most likely through higher taxes.
Any discussion of the current economic environment would be lacking without addressing the U.S. presidential election. With the understanding that polls are often wrong, recent polling suggests a Biden victory. The market has been digesting this information and has continued its upward climb as a Biden victory looks more likely. Historically, the market performed best under a Democratic President and a split Congress (one party controlling the Senate and the opposing party controlling the House) or a Democratic President and Republican Congress. However, the evidence that the market cares what party holds the White House or controls Congress is not overwhelming. The most significant risk for the market (at least in the short term) is a contested election or extended uncertainty of the winner. Regardless of the outcome, this country has shown a remarkable ability to survive and thrive in all kinds of political environments, and we remain optimistic that it will continue to do so. We continue to believe that a diversified portfolio specifically tailored to an individual’s needs works over the long term, regardless of who is in the White House.
Where do we go from here? Soon, the election will be behind us, and in many respects, that is a good thing, regardless of outcome. Generally, the market does not like the uncertainty preceding elections. Regardless of who occupies the Oval Office next year, we will still be coping with the virus. Experts predict a difficult fall and winter as we battle COVID-19 and the seasonal flu at the same time. However, even as cases and hospitalizations rise across Europe and the United States, I am optimistic. My optimism stems from a sincere belief that a vaccine will be developed relatively quickly. It has been reported the quickest a vaccine released to market is five years, but I don’t believe there has ever been a coordinated effort like the one we are currently seeing in vaccine development. There are almost 50 vaccine candidates presently being tested on humans. With that many shots on goal a solution is likely to be found.
One of the things I have enjoyed in writing these commentaries is finding quotes that speak to me; I hope they speak to you, as well. This spring, you heard from Queen Elizabeth II. Over the summer, I hope you listened to “Good Times Around the Bend.” I close now with lyrics written by Andrew Lloyd Webber for his 1984 musical, Starlight Express, that express my optimism that there is an end to this pandemic, hopefully sooner rather than later. “There’s a light at the end of the tunnel / There’s a light at the end of the tunnel / The inside might be as black as the night / But at the end of the tunnel there’s a light.”
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