by William Henderson, Vice President / Head of Investments
With September in the books and the fourth quarter on everyone’s mind, the markets looked to the renewed stimulus talks and posted some of the best weekly returns in months. For the week ending October 9, 2020, Dow Jones Industrial Average increased +3.3%, the S&P 500 improved by +3.7% and the NASDAQ was up +4.6%. These weekly returns moved all three broad markets indices into positive territory for the full year of 2020; with the Dow at +0.2%, S&P 500, +7.6% and the NASDAQ up a stunning +29.1%. While equity returns have given investors something to smile about, bonds continue to offer nominal returns even in the face of a steepening yield curve. The two-year U. S Treasury Note moved two basis points higher in the week to 0.16% and the 10-year U.S. Treasury Note rose eight basis points to 0.79%. Low rates continue to push down mortgage rates which are fueling a strong rebound in new home sales. According to Freddie Mac, the average 30-year fixed rate mortgage for the week ending October 9, 2020 was a record low of 2.87%. With such low rates, buyer demand remains robust with first-time buyers coming into the market. The demand is particularly strong in more affordable regions of the country such as the Midwest. The binding theme on all three markets – equities, bonds and real estate – is the Fed’s unwavering goal of keeping rates lower for longer and maintaining a near Zero Interest Rate Policy (ZIRP). 

We continue to have concerns around a COVID-19 fall resurgence in cases. Concurrently, there is global cooperation on finding a vaccine and hopes remain that the FDA will approve one this year, with global populations actually being vaccinated by Q3 2021. Uncertainty remains around the Presidential Election, and although national polls show Joe Biden ahead over President Trump, these same pollsters and pundits had Hillary Clinton ahead by nearly the same margin in 2016. The markets seem to be pricing in a mixed or balanced government after the election rather than a “blue” or “red” wave. A mixed government typically keeps a lid on drastic policy changes by either party regardless of who is in the White House. This week watch for a fight over media camera time between the SCOTUS’ Amy Coney Barret hearings, renewed stimulus talks among Speaker Pelosi and Treasury Secretary Mnuchin, and the back and forth between President Trump and former Vice President Biden. 

Staying the course and maintaining a disciplined investment policy with a keen eye towards diversification and risk management remains our policy at Valley National Financial Advisors. While major uncertainty remains in macro terms, forces exist within the economy (Fed, mortgage rates, market liquidity) that continue to fuel positive returns in the broader markets. 

View/Download PDF version of Q3 Commentary (or read text below)

Equities
Global equities showed well in Q3, as all three major U.S. indices, International, and Emerging Markets provided positive returns in the mid-to-high single digits. However, equities were ubiquitously down in September, led by the tech-heavy Nasdaq 100 Index. After bidding up technology companies – who, in many cases, have benefitted from 2020’s societal changes – since March’s lows, investors reevaluated if such companies’ positive fundamental outlooks had been over-reflected in their stock prices. Nevertheless, the Dow Jones, S&P 500 and Nasdaq all remain in the green year-to-date, as market participants shun the paltry yields available in fixed income and conclude that their best bets for satisfactory long-term returns reside in the equity markets. In light of the volatility that pervaded Q3’s close, I am reminded of the following words from John Pierpoint (J.P.) Morgan, the grandfather of what is now the largest bank in the world, when he was asked over 100 years ago what the stock market is going to do. “It will fluctuate”, he foretold.

Fixed Income
Interest rates remain historically low, as the 10-year treasury yield hovers around 0.70%. Interest rates are representative of investors’ opportunity cost; with rates as low as they are, there is incentive to pay higher prices for equities, as discussed above, because the investor forgoes little by passing on fixed income. The Federal Reserve has communicated that rates are likely to stay low until 2023, meaning that market participants can incorporate minimal opportunity cost into their expectations for the foreseeable future. As Warren Buffett once said, “Interest rates are like gravity on [equity] valuations.” The gravitational pull on the stock market is likely to remain historically weak until inflation sustains at over 2% – something that has not materialized since 2008’s financial crisis – and central banks around the globe are forced to intervene with monetary tightening.

Outlook
The marquee event over the next three months is, obviously, the U.S. Presidential Election. While the election has wide-ranging implications, of course, its greatest pertinence with respect to financial markets is that Congress is unlikely to pass additional stimulus until the Executive Chief perch is solidified.

Covid-19 continues to alter everyday life; however, the U.S. economy has demonstrated some signs of a V-shaped recovery. Most notably, for example, the unemployment rate has retreated to 7.9%; while this figure is still considerably above historical averages, it is worth remembering that in March and April, economists debated for how long unemployment would persist in the double-digits, specifically, whether the jobless rate would remain above 10% through 2020. Additionally, certain consumer trends have emerged stronger than most anyone expected when Covid-19 roiled the markets in March. For instance, several retailers reported all-time high sales metrics in Q2.

Multiple pharmaceutical companies, including Pfizer, Moderna, and AstraZeneca, continue their phase 3 vaccine trials. At this point, it appears probable that at least one vaccine will be granted FDA approval by year-end, or, at latest, by the end of Q1 2021, and that a method of inoculation will be available to the American public by the middle of next year.

While the global economy will not be unshackled from the pandemic’s recessionary forces in the near-term, risk assets are likely to remain buoyed by accommodative monetary policy and another round of fiscal support, the latter of which will likely come to fruition in early 2021. It is conceivable that, around the same time, a vaccine will be in production and dissemination, a combination that would certainly appear facilitative of robust economic and corporate performance. In all cases, the shrewdest investment strategy is that of adherence to one’s long-term plan and resistance of short-term maneuvers. 

VIDEO: Q3 2020 Market Commentary
Our CEO, Matt Petrozelli, introduces Bill Henderson, Head of Investments who offers a review of the third quarter, and economic outlook and perspective on long-term investing.
WATCH NOW

by William Henderson, Vice President / Head of Investments
Well, 2020 continues to shock and awe us and the markets. The news of President Trump and Melania Trump testing positive for COVD-19 certainly was news, and in an already packed wild news year. A Black Swan event is an event so rare, that the results cannot be modeled nor predicted. COVID-19 was our 2020 Black Swan event and thus far the markets have held up and the economy is coming back from an uncanny recession due to huge fiscal stimulus and massive monetary stimulus. The rule on Wall Street has always been “Don’t Fight the Fed,” and we have no plans on doing so. Fed Chairman, Jay Powell, has promised to do whatever it takes to keep the economy on the road to recovery and will use all tools in their monetary toolbox to do so. With that said, we remain positive on the U.S. Economy overall, and especially with a long-term view. There is a piece of framed artwork on the walls of the Valley National Financial Advisors office depicting the contributions of James Pierpont Morgan to the United States Economy in the 1800-1900s. I love this quote in the piece attributed to J. P. Morgan, “any person who is a bear on the future of the United States will surely go broke.”  

Although the news concerning President Trump affected Friday’s markets, all three market averages managed to end the week in positive territory. For the week that ended October 2, 2020, The Dow Jones Industrial Average was up +1.9%, the S&P 500 Index +1.8% and the NASDAQ +1.5%. Energy continued to be the worst performing sector while real estate, utilities, consumer discretionary, technology and financials all held up well. We had spells of good news in the economy. Unemployment fell by more than forecast, dropping -0.5% to 7.9%. Year-to-date returns remain mixed with the Dow (3.5%), S&P 500 +3.6% and the NASDAQ +23.4%. 

2020 will be remembered as one of the most difficult and tumultuous years in recent history for investing. October surprises impact markets and Black Swan events really impact markets but always over history, markets have recuperated. There have been four days in in 2020 where the S&P 500 Index fell by more than 5%: February 24 (-9.3%), March 9 (-5.3%), March 16 (-8.1%) and June 8 (-5.0%) and three days where the S&P 500 Index rose by more than 5%: March 23 (+10.9), April 6 (+8.0%) and June 1 (+5.1%). Just 7 days in the year gave so much volatility yet on a year-to-date basis the S&P 500 index is still up 3.6% as of October 2, 2020. Our investment thesis at VNFA remains – choose a clear and balanced investment plan, have a long-term view of your plan and allow us to monitor and limit your risk.