Review: Third Quarter 2020
In looking at our clients’ investment positions I tend to reflect on the level of risk in their portfolio and measure that against where the markets appear to be headed. Since I do not have a crystal ball, I must rely on sources I trust to give me information to make these decisions. In the current environment a considerable amount of information is tinged with a political slant. While politics can have an impact on markets it’s more about uncertainty than the politics itself.
Corporations are in the business of earning profits. To do this they must remain competitive, agile, and focused. They need to have the correct balance of equity and debt. The most important criterium is to understand their consumer. This may mean repositioning the business from in-store retail to internet retail. This may also mean laying off workers given the current circumstances of the business. Ultimately, the survival of a business is based on earning money in excess of the costs of running that business. The markets go up and down based on the projection of future profits, not necessarily current profit.
The S&P 500 ended the third quarter at 3363, up 263 points from the second quarter, for a gain of 8.5%. As of the end of the quarter the average was up 4.1% for the year.1 This seemingly good news is in large part because of the overall performance of tech stocks that make up a disproportionate amount of the index. The Dow Jones Industrial Average, which is also an index of large stocks, is down 2.7% year to date. This is seen in most other indexes as well.1
The S&P Mid Cap index closed the quarter at 1861, up 78 points, for a gain of 4.4%. This index is down 9.8% for the year. Small cap stocks, as measured by the S&P Small Cap 600 index, were at 855, up 2.9% for the quarter. For the year, this index is down 16.2%. Using the DJ Global ex U.S. index for international stocks, it ended at 246, up 6% for the quarter and down 6.5% for the year.1
Bonds, unlike stocks, were mixed for the quarter. The 10-year Treasury went from 0.65% down to 0.48% resulting in an investment gain for the quarter. The Bloomberg Barclays US Aggregate Bond Index fell to 1.17%, for a 6.98% gain for one year and a decrease of 1.67% from last quarter.1
We are living in a society where there is always “Breaking News”. Between newscasts, cable news, social media and whatever else is thrown at us, we do not have much of a chance to put it all in perspective. At the end of the first quarter of this year the unemployment rate was 14.7%. At the end of the second quarter it was 11.1%. At the end of the third quarter it was 7.9%.1 While this is not good news for those who are still unemployed, the trend is going in the right direction. As people began to venture out again, and fill up their cars with gas, the price per barrel for crude oil barely budged, going from $39 at the end of June to $40.22. An industry that is booming is the alternative energy group. We are beginning to see a significant shift away from fossil fuels. September was the worst month for the equity markets in almost a decade. Using the Russell 1000 growth index, another large stock index, in September it was off 4.8% and 1000 value index was off 2.6%.1 Once again, it’s important to keep results in perspective. A month does not make a market cycle.
Yes, we are in a volatile market, as we saw with September’s results, but as we get closer to the election this is likely to subside. The markets are best when the future is reasonably clear, no matter the outcome of the election. While it seems, at this point, that the profitability reports for the third quarter will not be that good, there are strong indications that going forward earnings will change for the better. This is leading investors to rethink their investment strategies.
Our thoughts on investment strategy remain the same. We have made no fundamental changes to investment strategies in the third quarter, where we have discretion over the accounts. We still believe that in the long run you should stay fully invested and remain diversified.
Thank You for 30 years
On October 9th Secure Planning turned 30 years old. I want to thank you, our clients and friends for allowing this to happen. I am also greatly appreciative of the excellent staff, most of whom have been with me for many years. Given the times, we celebrated with an in-house party. Lisa Dugan (22 years), Julie Smith (14 years), Rose Gilday (5 years), and our newest addition Callie Berry (2 years). Also celebrating were two of our representatives, Paul Whitcomb (22 years) and Justin Finn (20 years). For me it was a time of reflection. Julie Smith put together a photo album that brought back some very fond memories of all the years. Thanks to all of you!
1Markets Digest, Wall Street Journal, Oct. 1, 2020