What Did We See?
- U.S. Large Cap stocks, or the S&P 500 index, were down almost 3% in October.
- The developed markets of Japan was down almost 3%.
- Europe and the U.K. were down more than 5% and almost 4% respectively.
- Emerging Markets were up more than 2% and Asia (Ex-Japan) were up almost 3%
- Global fixed income returns were mixed.
Where Do We Stand?
- The market rally finally heeded some of the risks at hand and became a sell-off.
- The prospect for volatile events looms on the horizon but we are closer to clarity now.
- I took a small opportunity to put money to work in some higher risk areas but remain in a defensive posture across portfolios.
- I continue to rebalance your accounts accordingly within the confines of our risk management strategies.
As October came to a close the US markets were dominated by two major topics. The resurgence, and subsequent increasing of economic restrictions, of COVID-19 dominated one side of the markets. The upcoming US Elections dominated the other side. Both events and their results on economic growth drove volatility higher in the latter part of the month. For much of the month markets seemed poised to take a wait and see approach to both issues. However, in the final days of the month, widespread restrictions being announced across Europe seemed to tip the balance to the downside. The S&P 500 ended the month down about 3%.
An Atypical Sell-Off
Looking deeper into the data unveils some interesting information. The sell-off we experienced in late October was far from typical. Instead of a complete rush to safety, this sell-off seemed rather orderly. There was no major panic, although some of the moves seemed larger than normal. Furthermore, the winners in October were not all “defensive” by nature. In a broad based sell-off we will typically see defensive areas of the market outperform. Lower Volatility and High Quality stocks did not outperform. Put another way, Consumer Staples and Healthcare did not outperform. Furthermore, Small Cap stocks did outperform. If the market was in a “race for the exits” type of sell-off these areas of the market would not be acting this way. I viewed the moves as more positioning for the election than anything else.
Election Focus
The focus on this election has been intense. Over the month of October, Democratic nominee Joe Biden extended his lead in the national polls. He ended the month with a presumed 8 point lead in the election. As well, the likelihood of a Democratic sweep of the House, Senate and Presidency further bolstered the likelihood of a major new fiscal package. The winners of said fiscal package are likely in those areas that did outperform. Industrials, Materials, Utilities and Communication Services are a few that come to mind.
One might expect this to be a start of a new trend, where infrastructure takes center stage regardless of who is in power. Infrastructure spending is a great way to grow out of deflationary events like we have experienced. Furthermore, infrastructure spending seems to be one (of only a few) areas that both parties can get behind. This is something to keep a close eye on
Economic Immunity
The US economy has become rather resilient to the virus. The second wave we experienced in the summer did not have the same effect we felt in the first wave. One should expect that the third wave we are experiencing now will have an even more diminished negative effect. The amazing experiment that drives the US entrepreneurial spirit is alive and well. Restaurants that will survive have adjusted to the reality on the street. Corporations have learned to work from home. Schools are starting to figure it out. Granted, the most important thing in all of this is the vaccine, but we are surviving economically. Certainly, parts of the economy will not return to normal until a vaccine is widely distributed and certainly this will mean increased bankruptcies and closing of businesses.
However, from an overall GDP level we are not as bad as many believed we would be. US GDP is expected to fall by 3.4% in 2020. This is worse than we saw in the credit crunch of 2009 but it has the potential to come back faster and stronger than it did back then. Expectations for a 4.7% positive GDP in 2021 are not unrealistic. And further growth in 2022 and beyond have us recovering to pre-Covid levels much faster than they did after the Great Recession.
Around the World
In other areas of the world the results were rather divergent through the month. Europe struggled with their second wave of the virus forcing many major countries to implement national lockdowns. This has stalled their recovery and several measures of economic activity there have moved lower. In the UK, Brexit resurfaced as an issue. By the time the October 16 deadline came and passed a deal was not yet struck with the UK and Europe. Both sides are frantically negotiating to have a trade deal by the end of the year. The UK is dealing with their own second wave of the virus at the same time. China and the emerging markets came out a winner in October. The success of China in controlling the virus has allowed their recovery to continue unabated.
Advantageous Uncertainty
Markets hate uncertainty. The uncertainty of a second wave of the virus has been disconcerting to say the least. The uncertainty of a US Presidential election has probably had more of an effect on markets. Once that uncertainty is behind us I would expect markets to act (and react) in a more orderly fashion. Because of this (and the atypical sell-off cited above) I have put more of your money to work taking advantage of the lower prices. We still retained a defensive posture in all portfolios employing cash and positions in Gold where appropriate. Just a little less so. With the indicators for a strong global recovery in 2021 and beyond, the potential for stimulus in the next few months and a vaccine by spring, I would expect markets to react favorably. We are not out of the woods yet but I see some light through the trees now.
Election Note (11/5):
As of the posting of this note the Presidential Election remains undecided. Trump has amassed 214 electoral votes while Biden has 243. 81 votes in 7 states remain undecided. The counting continues and may take some time to be resolved.
Senate results are also a bit delayed but they appear to favor the Republicans keeping the Senate, while the House appears to remain with the Democrats.
We do know the following:
- The “Blue Wave” some were predicting never materialized. That is true politically but also economically. The big shift towards a “tax and spend” policy will likely not be happening. With a Republican Senate we either have the status quo (where monetary policy is the driver of markets) should Trump win or a political gridlock should Biden win. Either result is not terrible for markets.
- Polling in America is broken. The idea that we can predict election results based on a poll has been dying a long death and last night appears to be the final blow. They’re not going away. We love our data. They just aren’t reliable any more.
- Your investments will be OK regardless of the outcome. Most accounts have been sitting with 10% – 15% cash to buffer a result like this. We also added a small Gold position to your accounts in the prior weeks. This will further buffer the volatility that may come in the following days or weeks. These actions, along with your regular asset allocation strategy (owning bonds and other investments besides stocks) will do what they were intended to do – manage your risk and keep you disciplined.
If you have any questions or have experienced any changes in your financial situation please do not hesitate to Contact Me.
We appreciate you being a part of the Shorepine Wealth Management family!
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