Market Data for the quarter ended September 30, 2020:
- S&P 500 Stock Index: 3363, up 8.5%
- Ten-year Treasury Note Yield: 0.68%, up 0.03%
- Gold: $1,886 per ounce, up 4.9%
- Oil: $42 per barrel, up 5.8%
Stocks continued their post lockdown rally in the third quarter, led by a surge in growth stocks fueled by enthusiastic retail investors and ample liquidity from the Federal Reserve. The pace of economic recovery moderated over the course of the quarter, as evidenced by muted gains in oil and treasury yields, but investors were undeterred. The narrative, at least for the for the first two months of the quarter, was that the pandemic ushered in a new economic era, and that “disruptive” technology stocks offered limitless potential.
Moving forward, we see two primary risks to continued gains in stocks. The first risk is public health. Although the initial surge of the coronavirus pandemic has passed, it continues to circulate widely in the population. As such, the economy will continue to operate well below potential until a vaccine has been developed and broadly administered to the population. Our view is that such an outcome is still a long way off. Once an effective vaccine has in fact been developed, it could take up to six months or more to have it sufficiently administered to the population so that it brings the virus under control. The challenges are both a matter of logistics and convincing the public that it is safe. In the meantime, if the pandemic were to escalate in the fall and winter, a so-called “second wave,” stocks would be negatively impacted, new era economy or no new era economy.
The second risk is political. As of this writing White House and Congressional negotiators are working on a further round of fiscal stimulus to support the economy. This has been a slow, tortuous process, and it is by no means assured that a deal can be struck prior to the election. Such dysfunction would seem tame next to the possibility of a contested Presidential election to close out the year. President Trump has made it clear that he has no intention of accepting a defeat to Vice President Biden. Absent a straightforward Biden victory, a scorched earth political battle veering into a Constitutional crisis is a very real possibility. Such an outcome would be negative for stocks, perhaps significantly.
Regarding our investment posture, we are optimistic on the prospects of our portfolio. The emphasis on growth stocks over the preceding months has left the high-quality dividend paying stocks we concentrate on attractively valued. Our stocks have robust financial and operational strength and are well placed to successfully navigate a potentially difficult financial and economic environment. Our expectation is that they will enjoy substantial outperformance over the coming years, as the growth stocks that have led the rally thus far are for the most part overvalued and will serve as a drag on the broader market.
For the remainder of the year, we expect the stock market, as represented by the S&P 500 stock index, to trade in a range of 3000 to 3600. It closed the third quarter at 3363. If the virus and Presidential election can be successfully navigated, moderate gains are likely. If not, significant downside is a distinct possibility. As described above, we believe our portfolio is well positioned for either outcome.
As always, thank you for the confidence you have placed with us. Please do not hesitate to reach out to us with any questions or concerns you may have.