November 4, 2020
Pre-election volatility continued in October, with the S&P500 climbing 5%, then dropping some 7% for a net change of about 2.5%. Gold was a little less volatile and ended the month just slightly lower. Bond prices trended down all month, with the Aggregate Bond index down less than 1%, while the long bond fell about 3.5%. Our average moderate portfolio declined by 1.2% on the month, bringing year to date returns to approximately 8.5% for the average portfolio.
The pre-election volatility this year is similar to previous elections. For the 3 months preceding the election, there have been two increases of about 8% and two declines of 8%. 2016 saw a steadier decline of almost 5% in the 90 days prior to election. 2012 saw a climb of 7% followed by an equal decline. 2020 is not unlike any other year from a market behavior perspective.
Most recently markets have jumped back up (stocks and gold) into the very middle of the past 3 months’ range. Gold and gold miners also are moving and, as I type, moving up through their respective down channels. Markets do not like uncertainty and in the immediate term, the longer the count takes the greater the risk of rapid swings in prices.
Looking ahead, the technology sector has been lagging the general market while ‘value’ and dividend paying stocks have performed better over the past week. The price of oil had a recent bottom on October 29, and since climbed more than 10%. The energy sector ETF bottomed the next day and has climbed a similar amount. While not out of the woods yet, as additional stimulus and vaccine data comes out, energy has the most room to make gains as we gain vision to further economic growth in 2021.
However, the gulf between earnings and stock prices remains at historic levels. Market value of the SP500 vs Total GDP remains higher than in 2000. As I have stated a few times over the past several months, I still do expect 10-20% swings in stock prices, as we have seen over the past 2 years. As such, buying relatively ‘low’, after a decline and locking in gains after run-ups is the prescription for continued portfolio growth.
The Federal Reserve has stated quite clearly that its own monetary stimulus is needing the complimentary fiscal stimulus that can only come from Congress. Given the current state of the Senate, any stimulus is not likely until after the New Year. The timing of further fiscal stimulus and a widely available vaccine appear to both be pointing to a late first quarter, perhaps mid-year 2021-time frame. At that time we should be able then to make progress filling in the substantial (greater than 2008 recession) GDP output gap and have better vision as to the rate at which corporate earnings can exceed the 2019 high water mark.
Adam Waszkowski, CFA
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