Monthly Outlook: September 2020
Can you imagine you’re Rip Van Winkle and you’ve been asleep all 2020? (If only!). Forgetting all the other “stuff” that will define 2020, think of it purely as an investor. If you had been asleep these past eight months and just awoke to look at your typical growth portfolio, you’d notice a small gain of about 5%, YTD. Ho hum, what’s the big deal? Instead, you’re probably very awake and have experienced the following: A mild start to the year, a global virus outbreak and pandemic with no cure yet, a stock market collapse of 33% followed by a surprising stock market recovery of 56% resulting in an 8% YTD gain, record high unemployment of about 11%, an official recession, school closures, restaurants that are operating at half-speed, and an upcoming US Presidential contest of stark contrasts. Considering all of these happenings, it’s remarkable that a typical growth portfolio is up 5%. (Our iFolios 75 growth portfolios are up 6.7%). It’s been a wild and stressful ride to produce a modest return.
Is it Over – Was it a Bad Dream?
So, were the last eight months just a blip on the chart? Can we pretend it didn’t really happen and just blindly proceed from here? After all, the market is in about the same place as it was on January 1st (up 5%). Can’t we trust the market and its V-shaped recovery outlook? I think you know the answer, “Probably not.” Although the S&P500 price hasn’t changed that much from January 1st, the world has.
Before COVID, the economy was already slowing after a 10-year recovery from the last recession of 2008-09. Remember trade tariffs on Asian countries and the concern about Brexit and the European Union? And because of that 10-year recovery, stock valuations were at peak levels coming into 2020. Today, we still have those same issues, plus more. The COVID pandemic and resulting recession has resulted in corporate earnings declining 31% this year. Unemployment remains near record highs of about 10%. Valuations are at even higher peak levels due to the softer economy. Much of the fallout from the virus and recession are likely still to come as companies reassess their business models and growth outlooks. We’re already hearing more layoff announcements and downsizing as companies re-size for the new normal.
Federal Reserve and Government Stimulus
On the other hand, in response to this bleak outlook the Federal Reserve has printed trillions of dollars and Congress has appropriated a few trillions of its own in the form of stimulus checks. Much of the Fed’s trillions have found their way into markets which, in turn, have propped up stock markets, the wealth effect, and confidence. And unemployment insurance and stimulus checks have helped millions of employees pay their rent and other bills and to stay afloat for at least awhile. But surely there are practical limits to how much stimulus a government can provide? So far, the Fed is signaling they’ll remain full speed ahead with stimulus and politicians will likely dare not cut support in an election year. It is this blind faith in continued stimulus that is overcoming the bleak economic outlook and keeping markets buoyant. Let’s enjoy it while we have it.
Don’t Fight the Trend
We certainly have not been asleep these past eight months, nor do we dare take even a nap today! We have managed portfolios well through the big dip and recovery, trimming stock positions for protection in March and adding them back in the recovery. As a result, we’re beating market benchmarks a bit this year and with a lot less volatility month-to-month. Although we’re very aware of the serious risks to the market given the recession, virus, valuations, and more, we know that the continued stimulus is more powerful, for now. As long as markets continue to trend higher, we’re going to continue to hold and make money for our clients. Today, nearly everything is up-trending and we hold very little in cash. Bonds, US and Int’l stocks, Gold; they’re all up-trending. All that said, you can trust us that we’re wide awake and hyper-vigilant for any change. Our team comes to work everyday to monitor markets, answer your questions, and to provide you the growth and protection you’ve asked for.