Investment Review for Third Quarter 2020

A Lesson Against Market Timing. 

Following an across-the-board gain for assets in 2019, COVID-19 concerns led to steep sell-off for risky assets in early 2020. As trillions of stimulus dollars began to pour out of Washington, the trend quickly reversed, and asset values rose sharply off their lows. In September, a mini selloff took hold as hopes for future stimulus failed to materialize. By September 30, investors were in a much better position than in late March. Returns, however, could vary greatly if one attempted to sell out and buy back in at the wrong time.

Major asset class returns.

FAANNGM.

When analyzing U.S. stock returns, not all categories have done well. While U.S. large companies as a group were up 5.6% through Sept 30, both mid-sized companies and small companies declined.

If we dig a little deeper into U.S. large company returns, things become a bit murkier. Unfortunately, while the index was up 5.6%, most of the stocks within the index were not. In fact, large returns from a very small number of companies were able to overshadow hundreds of others. In total, seven companies (Facebook, Apple, Amazon, Netflix, NVIDIA, Google, and Microsoft) added 8% to the return of the S&P 500 while the other 493 companies combined detracted 2.4% from the return. In other words, without these seven stocks, the index would be negative year to date.

Unemployment Claims.

Prior to the pandemic taking hold, we had become accustomed to roughly 200,000 people filing for unemployment benefits on any given week. This number skyrocketed in late March and early April but has receded to below one million for the past several weeks. Unfortunately, we are starting to see additional layoff notices which could bring weekly initial unemployment claims back up in the weeks to come.

Working Remotely.

While many Americans have returned to work, there were still over 30 million teleworking or working from home during the month of September. Unfortunately, only certain industries are suited for this type of work. Service industries, such as finance, information technology, and education are at the top of the list with nearly half of those workers operating remotely. In contrast, it is very difficult for retail, leisure, construction, and transportation employees to operate offsite.

Similarly, we see that the more education an individual has, the more likely they are to be operating remotely. Nearly 50% of those with advanced degrees are able to work from home while less than 10% of those with high school degrees or less have the same flexibility.

Economic Activity.

Economic activity slowed earlier in the year during what many have termed “the pause.” As consumers stayed indoors and companies scaled down operations, retail sales, housing starts, and manufacturers’ orders fell. As hospitalization rates declined, treatment protocols improved, and trillions of dollars flowed from Washington to households and businesses, economic activity picked up. With stimulus money exhausted and virus concerns mounting as we move into fall, economic activity may once again come under pressure in the months to come.

Sentiment.

As we wait for more hard data to quantify consumer and business spending in the fourth quarter of 2020, we can utilize recent sentiment data as a predictor of future activity. After all, people tend to spend money more freely when they are optimistic and cut back when they are pessimistic.

The results of two key business surveys (one focusing on small businesses and the other on purchasing and supply executives of industrial companies) tells us that businesses were feeling much more hopeful in July and August than they were in April and May. While higher than earlier in the year, the last readings for both surveys continue to show that businesses remain a bit concerned about the future.

In contrast, consumer confidence was only slightly better in September than it was in April and May. As we inch closer to the holiday spending season, lower levels of confidence are a bit concerning when 2/3 of U.S. economic activity is generated from consumer spending.