Q3 2020 is in the books! It brought us some semblance of normalcy. The weather was beautiful and outdoor activities were in full swing. Now that the seasons are changing, we will have to wait and see what is in store as we are pushed inside. TFC, while allowing in-person visits, was still primarily virtual and remains so today.
From an advisory perspective, Q3 was focused on reviewing legal documents (e.g. wills/trusts/powers of attorney/etc.). We reviewed client documents for beneficiary and executor accuracy, as well as any special situations. While a review does not take an enormous amount of time to do this, it is important because legal documents tend to be ignored once drafted. For example, we uncovered that one divorced client still had their ex-spouse listed as executor and primary beneficiary, which was not their intent. A quick call to the drafting attorney solved that problem in about 15 minutes.
Q3 was also a period of investment reviews at TFC. Many clients had concerns around the upcoming election and the tenuous political climate. In short, elections come and go. Any froth during an election cycle is generally short-lived. Change is slow but, as Bob Dylan said, “the times, they are a-changin’.” You can expect change in the next 4 years, regardless of who occupies the oval office. Q4 would be a good time to review potential changes after the election is complete and we have a slightly clearer idea of potential changes to come in the next 4 years. Until then, get outside and enjoy the colors and everything else…before it snows! For a more in-depth discussion, check out my recent election focused blog post.
On a more personal note, two of Derek’s daughters started school in September. Maddie (1st grade) began her semester of virtual learning through the 
TCAPS UpNorth Virtual Live program. She comes to the office every day to attend school through her laptop. Olivia (pre-K) is going face-to-face at Central Grade school. Her class size is small and the classroom is isolated from the general school population, so we felt as comfortable as possible (see: not really comfortable) sending her to school. I can attest that she needed some interaction with other kids outside of her family! Lucy is hanging out at home learning how to boss everyone around. Jen (Derek’s wife) is back teaching (kindergarten), albeit virtually for the foreseeable future.
Melissa entered her third trimester and is rapidly approaching her due date of November 15th. On top of growing a tiny human, she and her husband closed on their new home and moved to Duck Lake Peninsula. They are feverously organizing and redecorating in preparation for Baby Niedzielski! Melissa will be on maternity leave Nov-Jan, returning in February 2021. Bridget Thoreson will take over during Melissa’s downtime with her newborn. We will send a future email introducing Bridget.
Looking forward through year-end, tax planning and insurance enrollment take center stage. Medicare open enrollment is happening now. If you have questions or need any guidance, please let us know. Employee benefit enrollment windows usually occur in late Oct/early Nov. Please touch base if you have questions and we have not met yet.
Now for the Market Update…
Stocks: The S&P 500 returned 9% including dividends during the third quarter as optimism persisted regarding economic recovery. The Dow Jones Industrial Average returned slightly more than 7% while the tech-heavy NASDAQ Composite was up 11% on a total return basis. The big story was the move in shares of mega-cap technology and communications firms like Facebook, Apple, Amazon, Microsoft, and Google (the FAAMG stocks). The group had a meteoric rise into early September before cratering back down to reality. Nevertheless, it was still a strong summer for the stock market. The US small-cap index, the Russell 2000, returned 5% – underperforming its large-cap brethren in the S&P 500. Equities built on huge gains during the second quarter as the pandemic eases across much of the nation and traders pin their hopes on further economic recovery. Optimism also persists around a second round of stimulus from Congress.
Digging deeper, the best sector in the US stock market over the summer was Consumer Discretionary which rallied 15% – led by Amazon and other online retail players. Virtual learning and work-from-home continue to be the themes this autumn, and that has benefited retail firms with a strong online presence. Shares of Zoom have been very strong this year as you could imagine. The big losing sector for the quarter, and in the last 12 years, was Energy. Exxon Mobil & Chevron are the large companies in the group, and they were taken to the woodshed despite stabilizing oil prices. The trend away from oil and coal and toward solar, wind, and other green energy is changing the energy landscape.
Overseas, foreign stocks rallied 7% including dividends while there was particular strength in emerging markets like Brazil, Russia, India & China. The emerging-market ETF returned more than 10%. While Europe struggles with a second wave of COVID-19, the major stock markets across the region are faring much better versus the devastating springtime when the first wave struck. It goes to show how the financial markets tend to ‘discount the news’ to a certain extent – we all knew a second wave was coming, so the market had prepared for it. Meanwhile, it’s ironic that some of the worst hot spots right now (like Brazil) had strong stock markets in recent months.
It’s a good time to check-in on how the equity markets are doing so far this year. What a year it has been – stocks jumped during the first 7 weeks of 2020 as the US economy was chugging right along with unemployment near record low levels and inflation running in a comfortable range. Then COVID struck. The stock market had a classic crash from February 19 to March 23 – call it a ‘flash bear market’ – blink, and you may have missed it. But those were some scary days for investors! It was not fun seeing the Dow drop 1,000 points or more in a single day.. after day.. after day. But as is so often the case, the snap-back rally was nearly as swift. The stock market soared from late March through April, then generally held its gains through June before another leg up during July and August. September was a rough month, though nothing like the volatility and declines we experienced in February and March.
Now here we are with only a few weeks to go until election day. The markets may continue to be on edge until confidence grows as to who wins the White House and what the makeup of Congress will be. The good news is that stocks tend to move higher during the fourth quarter. Perhaps investors start to feel cheery as the holidays approach. And we all will feel a lot better once we put 2020 behind us. But all in all, it hasn’t been a bad year for investors – believe it or not! The S&P 500 has returned 5% while the NASDAQ is up more than 20%. The Dow is down 1%.
Bonds: It was a real snoozer in the interest rate market during the summer. The benchmark 10-year Treasury yield ranged from about 0.50% to 0.80% despite a volatile stock market at times. It remains a great time to refinance your mortgage considering that the average 30-year fixed-rate mortgage is near 3% and the typical 15-year fixed is near 2.5%. The US Federal Reserve remains on stand-by to support the bond market so that interest rates stay low during this tough economic time for many Americans.
Despite a quiet interest rate market, some niches of the bond market did quite well. Credit-risky bonds like junk debt and convertible bonds rallied more than 5% on a total return basis. Overseas, international bonds returned 2-3%. Going forward though, expect very weak growth in the fixed income world due to today’s very low starting yields. Diversified investors in a traditional 60/40 stock/bond portfolio should expect much softer returns versus those seen in the last 5, 10, and even 30 years.
Economy & Policy: The US economy suffered its worst quarterly decline on record during Q2 with a drop of 31.4%, but the silver lining is that GDP growth in Q3 is expected to be up 32%. Keeping things in perspective though, a return to the level of economic activity we had before COVID is not expected until mid to late 2021. The virus and economic shutdowns were just that devastating. It left a trail of winners and losers – the winners were companies that had plenty of cash on hand (like an emergency fund) and were able to easily and swiftly shift operations away from brick & mortar sales to online. The losers (not to use that term in a derogatory sense) are those that could not move away from face-to-face business operations – like restaurants, hotels, and other travel & leisure firms. The US Federal Reserve and Congress recognized this narrative playing out and decided to create lending and grant facilities to help those companies most in need. More macro, the Fed also decided to go down a path of flexible interest rate policy – which allows the inflation target to temporarily shift above the usual 2% ideal rate. Why do this? So the economy can better thwart off a double-dip recession.
Turning to other economic data points, the unemployment rate has fallen to 7.9% as of the report released in early October for September. It’s been a much quicker recovery than many had thought, but it’s not all rainbows & unicorns. The number of permanently unemployed individuals is growing. Temporary layoffs are turning into long-term unemployment. Meanwhile, the $600 federal unemployment stimulus ended more than 2 months ago, and citizens in need await more assistance from Congress.
Inflation is running at a rate of 1.5%-2.0% depending on which metric you look at. This is an ideal range, but food inflation has been running higher than usual in the last few months as more folks buy the same items at the grocery store and are reluctant to eat out.
On the political front, all eyes are on the upcoming election between Donald Trump and Joe Biden. The odds-makers suggest Biden has a lead across the electoral college right now, and Michigan has about a 70% chance of going blue. Analysis from Goldman Sachs suggests the Biden economic plan may include a high amount of stimulus which would boost economic growth during 2021. The policy impacts from a President Biden would be accretive to S&P 500 corporate profits by 5-10% in 2021 before fading in the latter years of his term. Much remains to be seen, and time will tell. Wall Street is concerned about a higher tax regime under a Biden Administration, however.
Commodities & Currencies: Rumors of the death of the Dollar are greatly exaggerated! While the Greenback fell during the third quarter, down about 4% versus the Euro and 2% against the yen, it finished September well off the lows. Gold had a big run-up through early August, climbing to an all-time high of $2,089, but then was sold off to $1,850 by late September as the USD rallied 3% during the last few weeks of the quarter. Oil was very quiet through the July-August-September period, ranging from the upper-$30s to mid-$40s, helping to keep gasoline prices in check as Americans gradually return to the office.
Here’s the point: 2020 has been a tough year. It’s been downright depressing and isolating for many of us, sadly. The good news is that things seem to slowly be returning to normal for many areas of the country as the pandemic, while still a serious concern, is easing for many states. In Michigan, things are certainly better than they were back in the spring. All we can do is be safe and responsible. The markets expect a vaccine to be available to the public during the summer of 2021, but hopefully, the worst of the virus is deep in our rear-view mirror by then. And now we have an election to consider in less than a month! And there is a holiday shopping season that could be tough for so many struggling parents who may have lost a job.
There’s a lot to worry about, but also a lot to be thankful for, too. Many of our clients are actually doing ok financially since we have been sticking to an investment plan through all of the tough periods this year. Q4 2020 is perhaps the most appropriate time to count your blessings if you are indeed doing at least ‘ok’ through this new normal.
But our job is to help you navigate through the financial markets, manage risk, and ensure that your long-term goals are on the right track to being met. A volatile stock market, potential tax law changes, and a challenging environment for retirees are three factors that confront investors. We are here to guide you through the maze and cut out the noise. It continues to be an honor to work with you. Be safe and take a moment to enjoy the upcoming holiday season!
Charts of the Quarter (Source: Topdowcharts):
Featured Photo: Photo by Patrick Tomasso on Unsplash