Market Insights and Outlook
This week marks eight months since the U.S. stock market lost 34% in the fastest thirty-day correction in market history. In many investors' minds, there have been numerous reasons to stay on the sidelines and out of the market this year – concerns over the presidential election alone added a few dozen more. Yet, here we are eight months later, with most major indices approximately 50 percent above their March lows.
Please read on to understand our outlook and perspective on the economy and markets. As always, please reach out to me directly or anyone on my team to further discuss your concerns and needs. We wish you a wonderful holiday season, and stay well!
Michael A. Schreiber
The stock market and economy rebounded significantly this year as businesses started reopening and customers began to spend. While GDP rebounded at an astounding 33% annualized rate last quarter, the economy remains well below pre-COVID highs and has come back about two-thirds of the activity lost in the first half of the year. As we approach year-end, hopes of high-efficacy vaccines coming much sooner than expected are pushing stocks higher and making the longer-term outlook appear brighter. We are also seeing a bit of a tug of war between this anticipated post-pandemic economic growth and the recent surge in cases pushing down near-term growth. It is important to keep in mind that the stock market is a forward-looking indicator, with valuations already building in future expectations that the economy will return to pre-COVID levels by next year. While the stock market may be indicating that we are headed into a recovery, the economy has a long way to go, and investors should expect that the return to “normal” will take time.
There is no doubt that the economic rebound has been fueled by the trillions of dollars in fiscal relief and unprecedented easy monetary policy. The U.S. government and Federal Reserve are taking extraordinary measures to boost the economy, which should continue to inflate asset prices and fuel the markets. Many clients have asked about inflation concerns with these stimulative policy responses and the surge in the deficit and government debt, but the back-drop remains deflationary for at least the next several quarters. Certainly, some households and businesses are bouncing back more quickly than others. While the overall economy is improving, we are seeing some divergences caused by the virus as the prevalence of working and being home has affected the way consumers spend with stronger trends in goods production and less so in the services sector. Some of these changes may persist, such as online retail continuing to do well while traditional brick and mortar businesses suffer. We also see a disparity in the real estate market with a boom in residential housing driven by historically low mortgage rates and working from home, while commercial real estate remains beleaguered. We are also closely watching unemployment, which has fallen dramatically from its April peak, but we see the potential for rising permanent job losses versus declining numbers of temporary unemployment. These are just a few of the metrics that we are keeping an eye on as we head into 2021.
Since the market lows, we have continued to invest significantly for our clients, adding equities and fixed income as appropriate based on your risk tolerance and needs. We have not swayed from our recommendation that clients stay committed to long-term goals and remain invested in broadly diversified portfolios. It bears repeating that markets are far more complicated than they appear in the media headlines and that we need to look "under the hood" at numerous fundamentals and economic factors. Fundamentals do matter, and while buying the latest IPO is okay for your speculation “play” money, it should not be part of the long-term plan for most investors. Most clients understand that the stock market does not only move up, as it has given the illusion to this past several weeks. While I wrote previously about the limited numbers of securities fueling the markets higher, we have begun to see an increased breadth in the market with more sectors and asset classes participating in this rally on top of just a few technology and growth companies. This is a welcome and healthy sign in the markets, and we have positioned portfolios for these rotations and believe they will continue. Though we never try to predict the future, we have a keen understanding of greater economic forces and how the markets work. That being said, investors (professional or otherwise) who think they are smarter than the markets risk permanent destruction of their wealth.
As we look to the next several months, we expect to see a stop-and-start economic pattern continue for a while. Even with vaccine optimism, we are still faced with recurring cycles of virus spread and tightening restrictions, and the recovery may not be linear. As such, we expect associated fluctuations in markets and asset prices. We are also likely looking at a split Congress that is unlikely to produce significant tax policy moves, other than a stimulus bill, to mitigate the economic damage of COVID-19. Both parties continue to disagree on the package's size, but all agree that we will have a stronger recovery if we can get more fiscal support that will inject money into the economy by extending unemployment benefits and funding programs like vaccine development and distribution. Investors should also expect an infrastructure spending plan, which has been supported by both parties and could provide a significant stimulus to the economy.
As we hopefully enter the light of better days, the story remains the same as it has through my career and well before; presidential elections, media headlines, and political posturing do not move the markets. Fundamentals and numerous complicated economic factors give a far better education on asset prices' fate in the longer-term.