Review of 3rd Quarter
U.S. Stocks continued their recovery during the third quarter, increasing in value by 9%. However, September looked quite different than the previous two months, as stocks rose by 13% during July and August, but fell by 4% during September. Foreign markets also did well during the quarter – developed international markets rose by 5% and emerging markets went up by 10%. Bonds increased in value by 1%.*
Until April of this year, we always presented a table in our quarterly outlook showing various economic data. Since the pandemic, we have ceased doing so, because the data is so woefully out of date that such a table would be misleading. For example, the most recent GDP data is from the second quarter, which showed a 31% decline from the previous quarter. We know the situation has gotten better since then, but how much it’s improved is pure guesswork. What is driving the current valuation of the market is forecasted corporate earnings, the status of the pandemic in terms of likely infection rates and progress towards a vaccine, and political uncertainty. After declining by 50% in the first quarter, corporate earnings increased by 37% in the second quarter. Moreover, earnings are expected by security analysts to increase another 20% in the third quarter, and continue to increase throughout the remainder of 2020 and 2021.**
Uncertainty and Volatility
On September 1, we published a commentary warning about increasing volatility in the markets. While we seldom make specific short-term predictions about markets, we did get this one right – volatility in September, measured by the size of daily movements in the S&P 500, was three times higher than it was in August. The decline during the month in stock values was in part caused by this increase in volatility.
We listed several specific factors in that commentary that caused us to be concerned about volatility – the most important being uncertainty about infection rates, progress on the development of a vaccine, and the potential of a constitutional crisis involving the election. The factors that caused the volatility spike have not diminished, so it is likely that the elevated volatility will continue. It’s important to recognize that volatility means both sharp increases and decreases, so our belief in continued uncertainty does not necessarily mean that stock prices will decline, but the risk of a decline is heightened.
Our view on bonds has not changed. They will certainly have far less volatility than stocks, but with yields at an all-time low, the return potential is disappointing. 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.
As we stated last month, for those of you who have a long-term investment horizon and have carefully considered your current investment strategy, there is no reason for alarm. Many of you who are in retirement or are retiring in the next few years have recently modified your strategy, and you need not make any further changes. As always, we are eager to have conversations with you if you have concerns about your portfolio.
As I write this, I’m three miles outside of the evacuation zone for the wildfires that are currently plaguing Sonoma and Napa Counties. Several of our clients in California and Oregon have either had to evacuate or sustained losses from fires. We also have clients that have tested positive for Covid-19, and their hardship is far worse than the broad economic concerns we stated earlier. Words are insufficient to express our concern for those of you who are facing hardships, but our hearts sincerely go out to you.
* 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.
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