Only three months to go!
We are finally getting to the back stretch of this ‘annus horribilis,’ the Latin term made famous in the modern era by Queen Elizabeth II in 1992 after the British Royal Family suffered an awful year of tragedies and scandals.[i] The daily events and revelations are overwhelming with the latest jolting news of President Trump and the First Lady testing positive for COVID-19, along with a number of Senators and other government officials/ advisors. [ii] As we continue to mourn for those lost to COVID and adjust our lives to slow its spread, face racial injustices and the frustrations that have poured out in many cities and led to instances of violence, suffer the destruction of historically vast and devastating Western wildfires, endure a hurricane season that is well into the Greek alphabet, and brace for an election that may not produce a winner for weeks or longer, my imagination is tapped out for what could possibly happen next in this wild, crazy and very unsettling year.
But a lot of good is happening too
As disturbing as the daily news is, 2020 is remarkable in many ways. Individuals, businesses, non-profits, and government have stepped up to keep the economy functioning and have adjusted to this new world without causing massive shortages – which was a major fear back in the spring. For as dysfunctional as the legislative branch has been, we have $3 trillion in stimulus already authorized and another roughly $2 trillion in negotiation that, while very fluid, is looking more likely to happen, if not before than after the election.[iii] While roughly half the jobs lost from COVID in the spring have been recovered, job growth in September was disappointing, and layoff announcements from companies like Disney and Allstate are starting to mount.[iv] Specific relief for airlines to avoid furloughs is expected soon.[v] Progress from global life science institutions towards COVID vaccines and therapies continues on a historically super-fast track.[vi] While parts of Europe are struggling with a resurgence of cases, most of Asia has COVID well under control, and the economic recovery in 2021 is forecasted to be pretty robust, with the Asian Development Bank projecting 7.7% growth in China next year and 9% in India.[vii],[viii]
Markets benefit from corporate performance, the Federal Reserve and Robinhood?
After a strong July and August for equities (the best August since 1986), markets pulled back in September, but good gains held for the quarter with the S&P 500 rising 8.9%.[ix] By the end of August, the speculative spirits in a number of leading technology-related stocks got pretty frenzied. Those companies have enjoyed strong profits as great demand for technology has fueled the work-at-home economy, but other forces played a role too. The Federal Reserve announced in August a shift that will allow it to keep interest rates lower for longer – perhaps not raising rates until as far away as 2023.[x] With interest rates close to zero, valuations can elevate to historically high levels. Another phenomenon of the stay-at-home economy was a pickup in retail stock trading over the summer. One of the leading online trading platforms is Robinhood, and it has been a popular place for first time investors–50% of their new customers this year are new to investing.[xi] Parts of the equity market just got pretty hot by early September, and the 3.8% decline in the S&P 500 for the month was a not-too-painful way to deflate some of that excess.[xii]
Lesson of 2020: Affirmation of Three Key Investment Principles
Markets move faster and faster, which has forced policy makers (whether they be legislative or monetary) and businesses to react more quickly and more profoundly. In February, the S&P 500 hit a record high. It then fell 30% in March and by the end of September, had risen 5.5% for the year.[xiii]
- The case for trying to time markets or make significant tactical bets on certain industries is as weak as ever.
- Diversification works – latest example: just as technology growth stocks powered the market higher and higher in July and August, value stocks from sectors like materials, transportation, and industrials outperformed growth stocks in September. What’s working well at this very moment can change to other areas very quickly. Keep all the bases covered at all times.[xiv]
- Don’t fear volatility, take advantage of it. We follow a very disciplined approach and track allocations carefully. As areas get meaningfully overweight or underweight, portfolios are rebalanced.
We are all getting through this year together, and we’ll get through what may lie ahead in 2021 and beyond. Hopefully, ‘21 does bring much more good to the world than ’20. The affirmation that these key principles to building a sound and durable investment program have worked well in this tumultuous time is a great reassurance.
Stay safe and hopeful!
John M. Bussel
Chief Investment Officer
Team Hewins, LLC (“Team Hewins”) is an SEC-registered investment adviser; however, such registration does not imply a certain level of skill or training and no inference to the contrary should be made. The information contained within this letter is for informational purposes only and should not be considered investment advice or a recommendation to buy or sell any types of securities. Past performance is not a guarantee of future returns. It should not be assumed that diversification protects a portfolio from loss or that the diversification in a portfolio will produce profitable results. The opinions stated herein are as of the date of this letter and are subject to change. The information contained within this letter is compiled from sources Team Hewins believes to be reliable, but we cannot guarantee accuracy. We provide this information with the understanding that we are not engaged in rendering legal, accounting, or tax services. We recommend that all investors seek out the services of competent professionals in any of the aforementioned areas.
[i] The Royal Family. 2020. A Speech By The Queen On The 40Th Anniversary Of Her Succession (Annus Horribilis Speech). [online] Available at: <https://www.royal.uk/annus-horribilis-speech> [Accessed 2 October 2020].
[ii] Baker, P. and Haberman, M., 2020. Trump Tests Positive For The Coronavirus. [online] Nytimes.com. Available at: <https://www.nytimes.com/2020/10/02/us/politics/trump-covid.html> [Accessed 2 October 2020].
[iii] Werner, E. and Stein, J., 2020. [online] Washington Post. Available at: <https://www.washingtonpost.com/us-policy/2020/10/01/white-house-democrats-economic-stimulus/> [Accessed 2 October 2020].
[iv] Smith, C., 2020. Investors Can Trade All Kinds Of Commodities–Including Water. [online] Barrons.com. Available at: <https://www.barrons.com/articles/investors-can-trade-all-kinds-of-commodities-that-now-includes-water-51600960702> [Accessed 2 October 2020].
[v] Duehren, A. and Sider, A., 2020. Pelosi Signals Support For Airline Aid As Relief Talks Continue. [online] WSJ. Available at: <https://www.wsj.com/articles/house-to-move-forward-with-pandemic-relief-for-airline-workers-11601656393> [Accessed 2 October 2020].
[vi] O’Brien, S., 2020. FDA Willing To Fast Track Coronavirus Vaccine Before Phase Three Trials End. [online] CNBC. Available at: <https://www.cnbc.com/2020/08/30/fda-willing-to-fast-track-coronavirus-vaccine-before-phase-three-trials.html> [Accessed 2 October 2020].
[vii] Johns Hopkins Coronavirus Resource Center. 2020. COVID-19 Map – Johns Hopkins Coronavirus Resource Center. [online] Available at: <https://coronavirus.jhu.edu/map.html> [Accessed 2 October 2020].
[viii] France Presse, Agence, 2020. Virus Restrictions Threaten Asia Economic Recovery In 2021: ADB. [online] Barrons.com. Available at: <https://www.barrons.com/news/virus-restrictions-threaten-asia-economic-recovery-in-2021-adb-01600134604> [Accessed 2 October 2020].
[ix] Banerji, G., 2020. Stocks Finish Second Straight Quarter Of Big Gains. [online] WSJ. Available at: <https://www.wsj.com/articles/global-stock-markets-dow-update-9-30-2020-11601456359> [Accessed 2 October 2020].
[x] BBC News. 2020. Fed Relaxes Inflation Target In Policy Shift. [online] Available at: <https://www.bbc.com/news/business-53933239> [Accessed 2 October 2020].
[xi] Ponczek, S. and Greifeld, K., 2020. Bloomberg – Are You A Robot?. [online] Bloomberg.com. Available at: <https://www.bloomberg.com/news/storythreads/2020-10-01/buying-stocks-how-robinhood-e-trade-schwab-and-others-are-changing-markets> [Accessed 2 October 2020].
[xii] Bursztynsky, J., 2020. Big Tech Stocks Close Out A ‘Nightmare’ September. [online] CNBC. Available at: <https://www.cnbc.com/2020/10/01/big-tech-stocks-close-out-a-nightmare-september.html> [Accessed 2 October 2020].
[xiii] Spglobal.com. 2020. S&P 500® – S&P Dow Jones Indices. [online] Available at: <https://www.spglobal.com/spdji/en/indices/equity/sp-500/#overview> [Accessed 2 October 2020].
[xiv] McCabe, C., 2020. Value Stocks Are Outperforming Growth—At Least For Now. [online] WSJ. Available at: <https://www.wsj.com/articles/value-stocks-are-outperforming-growthat-least-for-now-11601469027?mod=series_q32020marketsreview> [Accessed 2 October 2020].