Third Quarter Market Review – Visionary Wealth Advisors

Third Quarter Market Review

John Fischer, CFA®, CFP® | Chief Investment Officer
October 15, 2020

It’s been a long, strange year – but  2020 is making its final turn as it heads for home. It’s been a record-setting year in the markets so far, and we still have one more quarter to go. Here are just a few of the highs and lows we hit in the last 9 months:

Stocks reached all-time market highs before the COVID-19 pandemic in late February upended all that (and everything else about our normal daily lives, too). Then, the S&P 500 plummeted as the fastest-developing bear market in history unfolded, with the market losing 30+% in a month.

The economy fared no better as strict lockdowns forced business closures and quarantines. GDP fell more than 30% (on an annualized basis) between the 1st and 2nd quarter of the year as a result, the sharpest decline in the U.S. history. Unemployment soared, from a 50-year low of 3.5% to 15%, its highest rate since the Great Depression.

Just when investors began to brace for a Depression-era like collapse, the market made a shocking U-turn. After hitting the bottom on March 23rd, it hopped on the back of historic aid from the federal government and the Federal Reserve to shoot upward once more.

The S&P 500 has risen 50% since bottoming out in late March, erasing its losses for the year. That made the bounceback the second-fastest ever recovery from a bear market.

Expect Continued Rough Roads Ahead

Given these extremes, it’s hard to predict how we’ll close out 2020. While the stock market has shown remarkable resilience, the economy has been slower to recover. Investors would be wise to expect continued volatility and uncertainty, as we’re far from being out of the woods.

Job growth has started to slow following the strong snapback in the economy during the 3rd quarter, and it will likely take several years for U.S. GDP to return to its pre-COVID levels. Due to these major factors – along with others like the upcoming election in November – there are 3 big events that investors must navigate as we enter the final stretch of 2020.

To Be or Not to Be (a Coronavirus Stimulus Bill)

In late March, the first coronavirus stimulus bill (the CARES Act) was passed by Congress. The measure provided $2.2 trillion in financial relief in the form of one-time direct payments to citizens, increased unemployment benefits, and aid for businesses as well as state and local governments.

It was another record-breaking event for 2020, as the CARES Act represented the largest stimulus package ever passed. That’s roughly equivalent to 10% of the U.S.’s annual GDP.

This fiscal assistance, along with the monetary stimulus of the Fed, was largely responsible for the stock market rebound in the spring. But with the pandemic continuing to persist without a vaccine expected for wide distribution until 2021, there has been mounting pressure for the government to provide a second round of stimulus to help bridge the economic gap for individuals, businesses, and state and local governments.

Negotiations for a second bill have been ongoing in Congress for many weeks with seemingly little progress. We can likely expect continued news headlines about the on-again, off-again negotiations that attempt to track every update and rumor. This, in turn, will likely contribute to market volatility until an agreement is reached.

The Unpredictable Path of the Pandemic

Last week, the number of new cases topped 45,000 per day, which is roughly a 50% increase above the rate in April when the U.S. initiated a self-induced economic lockdown to control the virus.1 The unrelenting nature of COVID-19 has left states in the difficult position of trying to strike a balance between re-opening their local economies and containing the virus.

From an economic standpoint, further strict shutdowns could spell disaster. Consumer spending represents more than two-thirds of the U.S. economy, and the confidence of consumers to resume their normal economic activity will play a major role in how the market responds in the coming months.

The uncertain path of the pandemic, a potential vaccine to help stop it, and that vaccine’s distribution are all significant questions that investors need to keep in mind as we close out the year. Until there’s more certainty as to the timing of a vaccine, investors should expect bumpy markets.

The Presidential Election

The spectacle of the presidential election is in high gear as we enter into the second half of October. In the lead-up to November 3rd, investors will continue to be inundated with election news and what the outcome could mean for their portfolios.

It’s in these times that investors should make certain their figurative seat belts are tight and secure; otherwise, in times like these, it’s easy to throw focus and rationale out the window in favor of following short-term emotions.

Before surrendering the wheel of your portfolio to the outcome of the election, let’s take a trip down memory lane to evaluate the merit of such a strategy.

The day before the 2016 election, Hillary Clinton’s chances of winning were as high as 91%.2 Additionally, many prominent economists predicted a strong market sell-off if Donald Trump won.3 Both outcomes were viewed with a wide consensus about their accuracy… and neither proved to be right.

That’s just one example, of course. But you can also consider this: since 1860, a portfolio of 60% stocks and 40% bonds has averaged an 8.4% return per year under a Democratic president and an 8.2% return per year under a Republican president.4

It is true that presidential elections have historically proven to create short-term volatility and as a result, investors should brace for a rougher ride leading up to and following the election. But over time, market fundamentals – such as the health of the economy, corporate earnings, and the level of interest rates – drive the long-term direction of the stock market (not who wins the presidency or which party has control of Congress).

The Roads of 2020 Have Been Rough – and We’re Not Quite Out of the Woods Yet

The ride for investors in 2020 has likely been the most arduous in more than a decade…and unfortunately, it’s not quite over. But remember: investors who stayed on their course during the turbulent times this year have been handsomely rewarded.

As investors look to the final months of the year, they should consider taking a few steps to navigate the looming uncertainties that lie on the road ahead. Confirm your portfolio is properly diversified, and make sure it’s appropriately balanced to reflect your true risk tolerance and time horizon.

Once you confirm your portfolio is calibrated correctly to what your long-term financial strategy requires, then tune out the noise. It might also be helpful to remember the chatter around what the market may or may not do is only likely to increase in the final months of the year.

For long-term investors, do your best to ignore that noise. Instead, focus on the road map of your investment plan, and keep your eyes on the long road ahead of you.

 

Source:

1 https://www.cdc.gov/

2 https://www.cnn.com/2016/11/07/politics/political-prediction-market-hillary-clinton-donald-trump/index.html

3 https://www.nytimes.com/2016/11/01/business/dealbook/what-happens-to-the-markets-if-donald-trump-wins.html

4 https://www.vanguard.com

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This Market Review (“Review”) is provided for informational purposes only.  The Review should not be construed as personalized investment, tax or legal advice, including the recommendation to engage in a particular investment strategy.  This Review, by itself, does not contain enough information to support an investment decision.  All information in this Review is considered accurate at the time of production, but no warranty of accuracy is given.  

Furthermore, investors should not assume that future performance of any specific index, security, investment product or strategy referenced in the Review, either directly or indirectly, will be profitable or equal to the corresponding indicated performance level(s).  Past performances referenced in the Review may not be indicative of future results and may have been impacted by events and economic conditions that will not occur or prevail in the future.  Any reference to a market index is included for illustrative purposes only, as it is not possible to directly invest in an index. Indices referenced in the Review are unmanaged, hypothetical vehicles that serve as market indicators and do not account for the deduction of management fees or transaction costs generally associated with investable products.  Investing involves the risk of loss and investors should be prepared to bear potential losses, including the full amount invested.