The Coronavirus pandemic continues to define 2020 as well as the economy and markets for good or for bad. It seems this volatility has been driven by “consumer market sentiment” (how people are feeling) vs economic factors such as unemployment and GDP (Gross Domestic Product). The trough of the COVID recession was late Q1 on March 20th. The relevance of that date coincides with the passing of the Cares Act. This Act provided much of the government assisted financial relief many received as individuals and business owners, and in turn flipped market sentiment which stimulated the economy. Along with the CARES ACT and the “reopening” of the economy, the markets shifted and have crept up to an overall positive trajectory.
Q3 has brought continued recovery. U.S. stocks posted the BEST quarterly performance in more than 20 years. Led by technology-based stocks, we saw a surge of interest in the development of the tech stock growth. It seems that the overvaluation and hype surrounding these stocks in late August led to a selloff in early September leaving stocks like Tesla losing 20% in two days and falling to bear status. In the U.S., the S&P 500 index gained 8.93% for the quarter. Large tech stocks drove the S&P 500 movements, surging through August before selling off in September. As of September 30, the S&P 500 was positive for the year at 5.57%. Developed International stocks (MSCI EAFE Index) still trail the U.S. for the year, returning 6.25% in Q3 and -5.44% year-to-date.
The VIX, used for measuring market volatility, was at high levels (4x its long-term average) at the onset of the Covid-19 stock selloff in March and April. It has gradually trended downward through the 2nd and 3rd quarters, but still ended Q3 about 30% higher than its long-term average.
For Q3 2020, the estimated year-over-year earnings decline for the S&P 500 is -21.8% compared to Q3 2019. Surprisingly, that is an improvement from Q2 2020 which saw a -35.7% year-over-year earnings decline. Initial predictions are for a -12.1% year-over-year earnings decline for Q4 2020 before returning to positive earnings growth in 2021. To give you scale the last 5 recessions have averaged -20% earnings.
The question on everyone’s mind is how the political landscape and November’s looming election will affect the economy and the markets. The most truthful answer is that we do not know. What we do know is that, historically, the markets see volatility in election periods. Once again consumer sentiment drives uncertainty which, in turn, leads to selloffs from the market, stripping capital from companies to produce and perform. In turn, this creates volatility in itself. After the election in 2016, futures, which are used to measure consumer market sentiment, were historically low, but rebounded shortly after and produced a 19.42% return in 2017. Regardless of your political position, in the past we have seen presidents and their policies create poor market conditions. For example, market conditions were very poor with the administration of Nixon, and Carter during the oil crisis.Patience is key. I often repeat a quote by Warren Buffet, “The stock market is the greatest instrument on Earth from transferring wealth from impatient people to patient people.” This concept could never be more true than now. Those who remain in their seats, especially when volatility strikes, are the ones who are most successful over time. Keeping your mind focused on discipline and not allowing emotions to drive investment decisions is the key component to achieving your long term financial goals.
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Written by Ronnie Thompson