3rd Quarter Client Note – COVID and Politics, a Potent Cocktail

Welcome to whiplash land. The S&P 500 (Total Return) Index gained 8.93% in the quarter and 5.57% year-to-date. On August 18, the index reached a record high for the first time since the COVID-19 bear market began on February 19. In just 126 trading days, the fastest bear market recovery on record, the market erased losses of 34% incurred in February and March.

Emerging markets posted a positive return of 9.56% for the quarter, outperforming the US and developed international equity markets for the first time in a long time. Foreign market performance has been boosted by a recently falling dollar, which magnifies the gains in international investments when converted back into dollars.

In fixed-income, the Bloomberg Barclays Aggregate Bond Index rose .62% resulting in a year-to-date gain of 6.79%.

The Fed announced a major shift on how it plans to react to and manage inflation. The Fed will now be targeting average inflation of 2% and not just future inflation. Meaning an uptick in inflation may not lead the Fed to raising interest rates; contributing to rates remaining low for an extended period.

In “normal” times the fixed-income part of your portfolio produces both safety and income. But with rates at near zero, now you have to make a choice. Risk in bonds comes from either of two sources: Credit i.e., corporate bonds; which is the same risk you incur owning stocks. Or, extending maturity. If you want safety in your fixed income, to balance the risk in the stock part of your portfolio, you’re going to have to sacrifice income in this zero rate environment.

Our friends at Dimensional Funds have captures all the details in their Quarterly Market Review.

The COVID-19 Economy

The economy has recovered approximately half of the 20 million jobs lost last spring. But that still leaves an awful lot of unemployment. The prospects for additional government fiscal stimulus remain uncertain, even as the Fed has seemingly run out of bullets.

The pandemic is far from over and will be a dominant factor in our lives for the foreseeable future. We continue to see 40,000 to 50,000 new cases and 1,000 deaths per day across the country. As indoor activity increases during the winter, these numbers are not likely to recede.

A return to “normal” will require continued mask wearing, social distancing, testing and contact tracing. There is no question but that these measures have worked to reduce the amount of contagion and the number of deaths compared with where we would have been without them. There has been some progress with treatments, such as Remdesivir and Dexamehtasone. And more, including preventative antibodies, are on the way.

Normalcy will also require the delivery and widespread distribution of a safe and effective vaccine – and millions of people willing to take it. This is unlikely to occur until well into 2021. Over the long run, yearly immunization, as with the flu, may be necessary as well. The pandemic will not end with a bang, but more likely with a whimper in the latter half of next year.

Morningstar’s excellent analyst, Karen Anderson, has a good summary of where we stand overall and, in this podcast, where we are headed in the race for a vaccine.

Election Volatility

We would all do well to prepare for a dose of election related market volatility. Here is my take on how an election drawn-out by disputes and contests could be the main driver of market activity in the fourth quarter.

Schwab Acquisition of TD Ameritrade Approved

On October 6, following approval by the regulatory authorities, Schwab closed on its acquisition of TD Ameritrade. For the time being, it will be business as usual for TD customers. Actual account conversion is not expected to occur for between 18 and 36 months. Fingers are crossed that the transition will be seamless.

Smashes, Crashes and Near Misses

I have given up trying to figure why the market continues to perform strongly while the economy is in the tank. Blogger Barry Ritholtz has the most recent explanation I’ve seen. His theory is that the market capitalization of the industries that have been most affected (retail, travel, energy, entertainment, dining) make up a miniscule part of the index compared with the tech giants that have been doing well. He may be right. But it doesn’t matter. It’s not anything you have control over. And chances are, if you tried to figure it out, whatever trades you made would be wrong. Or too early, or too late.

You’re better off taking a long-term perspective. This piece from Paul Kaplan, Morningstar Canada’s director of research provides excellent perspective on how to stay patient, put market crashes in perspective, and capture the market’s rewards over time.





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