Monthly Outlook: November 2020
At long last, we’re finally in election week. This year has been a stressful one for almost everyone, full of anxiety, uncertainty, waiting, and fighting. It’s just one thing versus another: Trump vs. Biden, Red vs. Blue, Rich vs. Poor, Covid Fighters vs. Covid Deniers, Urban vs. Rural, White vs. Non-white, Restaurants vs. Groceries, Amazon vs. Local Retailers, Airplanes vs. Road Trips. Everything just seems like a winner-take-all contest and it’s exhausting. The problem with “vs.” compared to “and” is that it results in winners and losers, with big consequences for society and for markets.
We’ll focus on the impacts on markets since that’s our role. The S&P500 this year has only gained 1.2%, which is far below average. But it hasn’t been a boring year. The S&P, sitting at 3,270, has moved about an equal 3,400 points up and down this year. The market’s gone up, down, up, down, up, and now down again to gain a measly 1.2%! And it’s not just the overall volatility that’s stressful. In our “vs.” world, there have been big winners and losers. The tech sector, for example, is up 22.1% while the energy sector is down 49.6%. Without the four big tech stocks (Apple, Amazon, Facebook, and Google) the S&P500 would be down this year.
The same kind of win/lose schism and volatility can be seen in other markets. International stocks are down 6.7% YTD with growth far out-performing value. Long-term US Treasury bonds have gained 13.7% but money market funds yield nothing, 0.02%. Commodities are a split house, too, with gold up 23% while oil is down 41.3%.
iFolios and Trend-Following
While we chronically monitor the news and listen to talking heads like everyone else, we’ve developed a better way to manage portfolios through volatile times like these. With our iFolios strategy, we’ve created signals that measure the price trend of any market. A market is either trending up or down, there is no guessing involved. We’ve found it helps returns to be fully invested in uptrends and minimally invested in downtrends. That’s how we “grow it – and keep it.” This year, the S&P500 has had an unusually high number of trend changes. We’ve seen five trend changes already compared to the long-term average, which is about one change per year. Sometimes, like 2013-2014 and 2016-2017, markets can go years without a trend change. Let’s hope that the next sustained trend is up, not down.
As we enter election week and the final two months of 2020 (yay!), nearly all stock markets turned back to new downtrends in October. Maybe it’s the uncertainty surrounding the elections, maybe it’s concern about resumed slowing in the economy, or maybe we’ll never know why, but the trends are down again. So, naturally we’ve trimmed our stock positions and are holding a lot of safe cash for now until the trends resume upward. Hopefully, that will be soon, but we don’t make the rules or the trends.
Even through all the volatility this year, we’ve managed to create small gains in our managed portfolios. Our typical iFolios 75 portfolios (25% bonds/75% stocks) are up about 2.3% YTD and about 5.6% over the last 12 months. Both metrics are slightly better than the market benchmark. And, just as importantly, we’ve done it with about 55% of the volatility of the market mostly by minimizing the big downturn in March 2020.
Looking forward to 2021
Like many of you (based on your calls and emails), we’re ready to move on to 2021, too. Hopefully, we can move from “vs.” to “and” and start working together to find solutions to a never-ending list of challenges. Hopefully, markets will become calmer and steadier, and will produce decent gains again across the board. In the next year, we might have some new tax issues and estate planning concerns that we’ll need to address, but we can deal with that. And hopefully, scientists will find a way to eradicate the coronavirus or at least help us manage it enough so that we can begin to move about and actually interact with our neighbors and fellow Americans instead of feeling divided. We can do a lot together. This holiday season, we’ll be wishing everyone Hope & Peace. It’s not too soon to start.