2020 3rd Quarter Outlook
Review of 2nd Quarter
The rapid recovery in stock market values over the past three months has been nearly unprecedented. Only once in the history of the S&P 500 – 1st quarter of 1975 – has the quarterly return exceeded the 21% return in April, May, and June. Other markets also did well -- developed markets rose by 15% and emerging markets increased by 18%. Bonds also rose by 3%.* While most equity markets are still negative for the calendar year, very few analysts, including us, expected the size and swiftness of the recovery.
Economic Conditions and Volatility
That stock markets have largely rebounded is a statistical fact. It does not take an advanced degree in economics to see that the economy, by in large, has not yet largely recovered. We’ve discussed analysts’ earnings forecasts for companies in the S&P 500 in our past commentaries. There’s not much change in that data from when we last reported them a month ago. Earnings in the second quarter are expected to grow at 18% over first quarter’s earnings, and the average quarterly growth rate in earnings throughout 2020 and 2021 is predicted to be 13% (or 60% compounded annually). Despite such impressive growth numbers, earnings are not expected to reach pre-pandemic levels until late next year.** While there are signs the economy is improving slightly – the aforementioned earnings numbers and decreasing unemployment are two indicators – the road back to normalcy is a long one.
That road has an uncertain length and has many twists and turns. There is a lot of uncertainty about … everything. Key questions that will affect economic conditions and stock market values include how long the recent spike in infections will continue, how quickly will certain businesses be able to safely reopen, which industries will be able to adapt to new conditions, what social behaviors are truly crucial to spreading the virus, and of course, the holy grail of questions, when will a vaccine be available. As new information is learned about the answers to those questions, stock markets will react in a big way. I’m surprised that the daily volatility in the stock market has not been higher than it has been, so I wouldn’t be surprised if it increased.
What about Bonds?
The good news about bonds is for the most part, they’ve increased in value in 2020. The bad news is their returns going forward. You can invest $100 in a ten-year Treasury bond today and earn $6.90 of interest. That interest isn’t per year, it’s the entire interest over the life of the bond – the annual yield is only 0.69%. Interest rates have never been lower. Meanwhile, inflation is expected to be at 2%-3% per year, so that bond investment is nearly guaranteed to lose money in terms of purchasing power. In our view, this is not the time to lock in long-term returns in government bonds. A diversified approach to bonds of varying maturities and different issuers, including corporate bonds, would provide much more flexibility and some added return.
We’ve nearly always preached the idea of remaining consistent with your investment strategy and not reacting to short-term downturns. That remains the case today. However, now might be the best time in history to re-examine that long-term strategy. We say that because:
We’ve just witnessed an example of how unpredictable factors can dramatically affect the volatility and values of our portfolios
Because of the rebound in prices, portfolio values for most investors are within 5% of where they were at the beginning of the year (and are likely higher than they were in January of 2019)
It’s likely most of you have not deeply considered any modifications to your investment strategy in many years, and yet many factors that affect that strategy have probably changed, including your time horizon, income level, retirement plans, and portfolio value
If you’re a current client, we invite you to start a conversation with your advisor about your investment strategy. If you’re not a current client, this might be a good opportunity to learn more about Savant. In either case, we look forward to the conversation.
* Source of returns is Morningstar, Inc. Past performance is not indicative of future results.
** Source: S&P Dow Jones Indices
This update is provided by Savant Investment Group, LLC (“SIG” or the “Firm”) for informational purposes only. Investing involves the risk of loss and investors should be prepared to bear potential losses. Past performance may not be indicative of future results and may have been impacted by events and economic conditions that will not prevail in the future. No portion of this commentary is to be construed as a solicitation to buy or sell a security or the provision of personalized investment, tax or legal advice. Certain information contained in this report is derived from sources that SIG believes to be reliable; however, the Firm does not guarantee the accuracy or timeliness of such information and assumes no liability for any resulting damages. Any reference to a market index is included for illustrative purposes only, as it is not possible to directly invest in an index. Indices are unmanaged, hypothetical vehicles that serve as market indicators and do not account for the deduction of management fees or transaction costs generally associated with investable products, which otherwise have the effect of reducing the performance of an actual investment portfolio. SIG is an SEC registered investment adviser that maintains a principal place of business in the State of California. The Firm may only transact business in those states in which it is notice filed or qualifies for a corresponding exemption from such requirements. For information about SIG’s registration status and business operations, please consult the Firm’s Form ADV disclosure documents, the most recent versions of which are available on the SEC’s Investment Adviser Public Disclosure website at www.adviserinfo.sec.gov.