My wife and I enjoyed a quiet dinner with friends last Friday night. As you might expect, conversation topics included the global pandemic, racial issues in the US, the US Supreme Court nomination, the 2020 election, last week’s first presidential debate and of course, President Trump’s positive test for COVID-19. Heavy dinner conversation, right? I hardly tasted my pasta dish, I was so absorbed by the conversation. And that wasn’t all. Somehow during a wonderful meal that lasted no more than two hours we also discussed, in no particular order, our respective children and parents, our children’s schools, our churches, books we had recently read, our knowledge of fine wines (zero for me), our exercise routines, back injuries, our hometowns, the automotive industry, management styles and leadership, US history, recent vacations (driving distance only, of course), the wildfires in California, working remotely, worker productivity, the phenomenon of smartphones, Steve Jobs, Winston Churchill, and even fishing.
Turns out we had a lot to talk about! And as you likely noticed, it wasn’t just the big stuff; it was the other stuff too. I’m sure your recent conversations with friends have been similar. These days, one might have the impression that the national and global issues of the day are “all anyone is talking about.” In reality, “we” are also talking about all that other stuff that makes a life. Life does go on. And as sad, unusual, and challenging as 2020 has been and will continue to be, life will go on.
Below is some economic and investment “stuff” that is also going on but that you might not see or hear in the lead story of the day. You’ll also find some advice and a bit of encouragement.
In the immediate aftermath of the economic shutdown of March and April, investment commentators spent way too much time gabbing about whether the economic recovery would be robust (V-shaped) or tepid (W-shaped) or even worse (L-shaped). As some predicted, thus far it has turned out to be robust. From May through August, the economy created millions of jobs, GDP rose dramatically, stock prices roared back and the unemployment rate fell sharply. While there were some less-than-stellar economic reports during September, the expansion appears to still be on track. You can read about the reasons for the bungee- jump behavior of the economy and market in our July 2020 commentary It’s the Fed. Here are a few data points that provide evidence of a continuing expansion.
According to the Atlanta Fed’s GDPNow tracking model, as of October 1, GDP is expected to be up 34.6% during the third quarter (seasonally adjusted annual rate, or SAAR), led by consumer spending increasing at an annual rate of 36.8% and capital investment increasing at an annual rate of 45.1%. Recall that GDP plunged during the second quarter, falling 31.7%, led by a 33% drop in consumer spending and a 26% drop in capital spending. Bungee jump indeed! Drilling down a bit, according to the US Bureau of Labor Statistics, the economy added 661,000 jobs for the month of September, bringing the total number of jobs added since May to 11.4 million. While the economy is still down 10.7 million jobs since February, when unemployment was near a record low rate of 3.7%, the unemployment rate has dropped from its high of 14.7% in April to 7.9% in September. According to the US Census Bureau, durable goods orders have rebounded since April with nondefense capital goods excluding aircraft up 10.5% for the four months through August. According to the National Association of Realtors, new home sales have soared, jumping 77.4% over the past four months through August. This number would be higher if not for the shortage of available homes. In August, the inventory of new homes was 3.3 months of supply, the lowest number on record. Even Federal tax receipts have been higher than projected.
Not all the data are rosy. There is growing evidence that we still face a long slog to escape the hole created by the virus crisis. The large number of jobs created over the last five months notwithstanding, the pace of job creation has slowed steadily each month since June, when a record 4.8 million jobs were created. And the gains have not been evenly distributed. Some sectors of the economy have thrived while others have gotten clobbered. Winners include technology, housing-related sectors, and transportation (except airlines). Those hardest hit sectors include energy, banks, REITS (office and retail real estate), and the service sector (especially restaurants, travel, gaming, and hotels). Unemployment among service sector workers remains very high while technology workers are in great demand. All in, the economy is likely to continue growing in the fourth quarter and into 2021 but at a much slower rate than observed during the third quarter. Total economic output is not likely to reach its pre-crisis levels until the second half of 2021.
From the high of February 19, 2020, the S&P 500 fell 34% to reach a low on March 23, 2020. From the low of March through the end of September, the S&P 500 rose 51.8%, ending the quarter slightly above the previous high of last February. YTD the S&P 500 is up 5.6%. The S&P 500 measures the returns of large US companies. As shown in the table below, the stocks of smaller companies and foreign companies have also recovered, but relative to large companies, they haven’t fared as well. Like the winners and losers of our economy, the stock market has had its own share of winners and losers. The gains have certainly not been evenly distributed. In particular, much of the gain of the S&P 500 since March has been driven by a handful of stocks including Facebook, Amazon, Apple, Netflix, Google (Alphabet), and Microsoft, known as FAANGM. Please read FAANGM Stocks—Winner Take All?, by Brian Bonewitz, CFA, a portfolio manager at Bragg. Brian explains that today’s market has had narrow market leadership resulting in these few stocks making up an outsized portion of the total market capitalization. He also reminds us that we shouldn’t be tempted to chase and overweight the popular companies of the day. Diversification remains the key for a long-term portfolio.
As we have pointed out in other articles, the stock market is forward-looking; its dramatic increase from the low of March to an all-time high in September reflected investor expectations that the economic impact of the virus would be limited in duration due to a combination of factors. These include the potential for the development of a vaccine, growing knowledge about effective treatments, implementation of healthy behaviors to slow the spread of the virus including social distancing and masking, widespread availability of personal protective equipment, and potentially even herd immunity. As pointed out above, the economic recovery and the behavior of the stock market point to the fact that for many segments of the economy, people have learned how to live (and work) with the virus.
As for vaccine candidates, according to the Wall Street Journal on October 1, there are currently four drugmakers with Phase 3 (the final phase) vaccine trials underway in the US, including AstraZeneca, Johnson & Johnson, Moderna, and Pfizer. Assuming the drug of one (or some) of these companies is approved for use, it must be manufactured and distributed.
As you know, there is disagreement about the timeline for all of this to happen. Comments by the drug manufacturers and by scientists lead this non-scientist author to expect a vaccine to be available no sooner than the second quarter of 2021.
Importantly, as investors, we should “get our news from the market” and ignore the biased media. The market is up a lot since March. But year-to-date, it is only up about 5%. It seems reasonable to conclude that the market sees a continuing but slow recovery, continued progress against the virus—maybe to include a vaccine—and something far better than a disaster with the November election. Speaking of which, please take time to read 2020 Election by Ben Rose, CFA, a portfolio manager at Bragg. Ben has included some compelling charts that tell a great story about the market and economy through election cycles.
During our dinner with friends last Friday someone posed the question, “How will 2020 be remembered in ten, twenty, thirty, and fifty years?” We compared 2020 to other significant periods of the last fifty years and concluded that this year likely would stand out. In my lifetime, Watergate stands out, as do the 1980 presidential election, the fall of the Soviet Union, 9/11, the 2008 Financial Crisis and Great Recession, the 2008 election of Barack Obama, and the 2016 election of Donald Trump.
Will my future grandchildren someday beg me to tell the story of 2020 when “everything changed?” Maybe they’ll sit on my lap and I’ll tell them all about this year: the news out of China; the shut-down, empty schools, offices, streets and churches; masks and social distancing; the 34% decline of the market in 23 days of trading; the loss of 22 million jobs in two months and the resulting hardship faced by fellow citizens; thousands upon thousands of empty offices in urban centers; the mass exodus from crowded cities for smaller towns or remote locations; the destruction of entire sectors of our economy; the widespread protests for racial equity; the violence; the devastating wildfires; an unprecedented presidential debate followed by a chaotic election, the winner of which was not determined for almost a month.
Or will my grandchildren even ask about 2020? I’m probably fooling myself to think they will; even my kids accuse me of being a dinosaur. But ask or not, I’ll be darn sure to tell them about it! I’ll also tell them about other meaningful events from my lifetime, and probably a bunch of other stuff in which they’ll have little interest. But even if the grandkids don’t ask about it, yes, 2020 will turn out to be “one for the books,” as they say. But will it change everything? I’ll suggest it will have far more impact on our future than say, 2014, to pick a random year. But will our country and our lives be forever different? I don’t think so. Our country will get through this, we’ll adapt, and we’ll go forward.
This is good news for investors. As long as the incentives and motivation are in place, people are going to get up and go to work each day; they’ll work hard to make a better product or deliver a better service for their customer, their patient, their student, or whomever they serve. As you’ve heard me say before, humans will make it bigger, stronger, faster, safer, healthier, and more sustainable. We’ve got some tough days ahead with the election saga we face. The market will likely be volatile. But the Republic will stand. The economy will grow and the markets will work. Our advice is to own an appropriate portfolio and to stay the course through it all.
In closing, let me say that I hope you’ve found a rhythm in your days that allows you to enjoy all that other stuff that makes a life, even as we deal with the enormous challenges of this year. Thank you for trusting Bragg Financial with your investing and planning.