2020 4th Quarter Investment Bulletin
The Recovery Chugs Along
The U.S. stock market achieved significant gains for the 2nd straight quarter following the pandemic induced selloff of February and March 2020. Fixed income also advanced with the overall bond market returning a little less than 1% with municipals and corporates faring better than government bonds. The low interest rate environment and the migration out of major cities has been a boon for housing and construction. As work from home orders filter into 2021, the demand for housing has created significant price increases in the purchase market.
Growth, Value & Earnings
The technology boom has led a growth dominated market which continued throughout the 3rd quarter. As you can see by the chart below value stocks have considerably underperformed growth, however, are trading at more reasonable premiums to historical earnings. Given the low interest rate environment, we would expect stocks to trade at a premium to their historical average (above 100%). As the chart demonstrates, some of those premiums are substantial.
Source: JP Morgan: Guide to the Markets U.S. 4Q 2020
Who Will Win The Upcoming Election? ...Investors!
While we can not recall a more passionately charged political climate, we rely heavily on our investment process, not emotions, to guide portfolio construction. Whether Trump or Biden wins the election, we anticipate near-term volatility. However, our strong belief is that overall market valuation will play a much larger role than the politics of the day if we measure over months and years, rather than weeks.
Patient investors will continue to be rewarded. Over the last half-century, the S&P 500 has been up during 40 of the last 50 years, i.e., 80% of the time. As you can see in the chart below, regardless of who was in the White House, the market consistently delivers with few exceptions.
Source: NYU Stern, Annual Return on Stock, T. Bonds and T. Bills: 1928 - Current, Damodoran
Cautious Optimism
Elections aside, a second pandemic-related economic shutdown poses the largest threat to a meaningful recovery. Peak unemployment of 14.7% in April 2020 was met with unprecedented government monetary intervention. Unemployment now sits at 7.9% and most sectors of the economy have begun to recover, although most not fully. As corporate earnings begin to improve and "normalize," other areas of the stock market should begin to pick up steam and we have been opportunistically adding to Value positions.
Patient investing means having a greater understanding of the long-term objective. Whether Republican or Democrat our goal for clients of Compass Advisors continues to be health, happiness and financial independence.