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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.

by William Henderson, Vice President / Head of Investments
Markets ended the week of September 25, 2020 in mixed territory with the Dow Jones Industrial Average down (1.8%), the Standard & Poor’s 500 Index down (0.60%) and the NASDAQ up 1.1%. While mixed markets are always confusing, it bears understanding why there is a divergence. Industrial companies are struggling, and we saw that with the Durable-Goods Orders number released last week by the Commerce Department, rising only 0.40% in August; which was much lower than economists’ predictions of 1.80%. Yet, technology companies continue to do well as online shopping, virtual connectivity and other e-commerce related equities helped push the NASDAQ higher. Wall Street and Main Street are seeing different things. 

The good-news, bad-news stories do not really mask the continued ongoing uncertainty impacting the economy. Few of our market disruption events have been quelled. COVID-19 pandemic is waffling between a vaccine and a spike; and which one will come first. The presidential election is no one’s guess. As of September 28, 2020, the top battleground state’s average according to Real Clear Politics shows Joe Biden winning by a thin 3.8 points. Is that enough to cover the “silent majority Trump vote?” The recession is lingering but good news abounds with record-low mortgage rates fueling a booming housing market. Last week, the Commerce Department said sales of new single-family homes rose 4.8% in August to a seasonally adjusted annual rate of 1.01 million! August 2020 sales were 43% above the year-earlier level. Low rates continue to fuel mortgage refinancing as well. Social unrest and protests continue and could actually increase as the Senate moves ahead with the confirmation of Judge Amy Coney Barret to fill the SCOTUS seat vacated with the death of Ruth Bader Ginsburg. The byproduct of the confirmation battle and the concomitant unrest is that any hope of a third round of fiscal stimulus gets tossed aside while both parties wrestle with the issue of the week instead. 

While the lack of further fiscal stimulus is a drag on the economy, a bright spot is the strength of the private sector and huge pent up cash reserves sitting in money market funds and bank deposits. Private sector cash holdings have surged during the pandemic. According to the St. Louis Federal Reserve Bank, the personal savings rate as a percent of disposable income was nearly 18% as of July 2020, a surge from January 2020’s level of 7.6%. Further, the sum of U.S. money market assets plus commercial bank deposits has grown by nearly $4 trillion, to $20 trillion, during the pandemic and now sits at more than 100% of GDP. This cash hoard can easily fill the void that a missing third fiscal stimulus package leaves. Being locked down as the U.S. consumer has been since March 2020, has allowed a massive buildup of ready cash and reserves, that once released, could fuel the economic rebound we need. Watch for cash to flow into the economy as each of our unknowns gets worked out or fizzles away. With the election just 36 days away, that unknown may become a known fairly soon. Lastly, Speaker of the House, Nancy Pelosi, is scheduled to meet with Treasury Secretary Stephen Mnuchin this week to continue discussions of a third fiscal stimulus package. We expect markets to continue to waffle, with pull backs and rallies each week because uncertainly is bad for traders and the markets and there is simply too much uncertainty going around these days. A long-term perspective must be taken in conjunction with a balanced, well-designed investment portfolio.