October 2020
Market Update

 “Without a doubt, the question we are most often asked right now is how we are positioning your portfolios for the election." 

We hope that this letter finds you safe and healthy during these still-unprecedented times. 

2020 continued to be one of the most unpredictable years in memory, as markets rose to new all-time highs in the third quarter despite a resurgence in coronavirus cases, as stocks rallied thanks to a combination of even more accommodative Fed policy, hopes for a COVID-19 vaccine and a stronger-than-expected economic rebound, before markets declined moderately from those highs in mid-September. While we all welcome this impressive comeback, we enter the final quarter of the year keenly aware that some of the biggest unknowns for the markets and the economy will be resolved positively or negatively in the next three months. 

Starting with the obvious, November 3rd is Election Day, and apropos for 2020 this election will be one of the most uncertain in our lifetimes. Beyond the most important question, “Who will win the Presidency?” markets are also focused on whether the Democrats will be able to take control of the Senate. If so, and Biden wins the Presidency, Democrats would control both the legislative and executive branches of government, a scenario dubbed the “Blue Wave” by the financial media. Such a scenario would result in the increased potential for policy changes which would likely create short-term market volatility. 

However, any near-term volatility associated with a Blue Wave would likely be small compared to the worst-case scenario for the election, namely that there is no clear winner by the end of Election Day and the election becomes contested which would result in the entire country being dragged through a similar episode of Bush vs. Gore in the early 2000s. In that outcome, we should expect significant short-term market volatility until a winner is declared, potentially as late as mid-December. 

Unfortunately, the election is not the only source of potential uncertainty and volatility coming in the next three months. Hopes for a COVID-19 vaccine have helped stocks rally to current levels, and there are now three separate vaccines undergoing final Phase III trials. Those trials will likely reach their conclusion in the coming weeks, perhaps before the election. If those trials fail to produce a viable vaccine candidate, that will also create volatility as markets are expecting widespread COVID-19 vaccine distribution by early to mid-2021. 

It is, improbably, already November, so we would like to take some time to wish you and your family a safe and happy Thanksgiving. 2020 and all that we have experienced this year has heightened our awareness of the importance of family and friends, and the time we spend with them.

And now, of course, we have President Trump testing positive for the virus, along with a growing number of staff and attendees of several of his recent events. This type of a health event for a president is not unheard of, but coming less than a month before very contentious elections in a year with a global pandemic it will only add to – you guessed it – the market volatility. 

Finally, by the end of the fourth quarter, investors will learn the fate of the stimulus bill currently stuck in Congress. There’s near-universal agreement the economy could use more stimulus, but the politics of the election, combined with Republican and Democrat differences about how much money should be spent and where that money should go, have prevented stimulus from being passed and delivered to the U.S. economy. Markets expect a stimulus bill to pass by year-end, and if that fails to materialize, it too will create more volatility. 

Without a doubt, the question we are most often asked right now is how we are positioning your portfolios for the election. 

In your portfolios here, the earlier volatility in September bumped part of our stock allocation to cash, but that was fairly short-lived and today all stock portfolios are fully invested. Our high yield bonds in the Total Return portfolio also exited to cash but we will likely see that cash put back to work in the very near term as markets have calmed in the promise of a new stimulus package. Provided nothing else new pops up! 

As far as anticipating the direction of the market given all the possible events just discussed, we will continue to follow the models we have spent more than a decade developing and watching several of our indicators as events unfold. These models worked effectively for us when we all thought the world could come to an end earlier this year, and we trust they will continue to give us an edge through these events as well. Remember, too, that it is not the person sitting in the White House with the biggest long term affect on the markets – it is who is handling the monetary policy and that is the Federal Reserve. They have been very, very clear in communicating their desire to keep monetary policy accommodative for as long as necessary. 

In spite of the volatility we anticipate will follow us through these next two months, it should tell you something that our models have us fully invested in stocks today. Volatility tends to be short-lived and once the unknown becomes known, markets tend to carry on. With the support of the Federal Reserve, and the anticipation of additional stimulus, we expect markets will calm and return to business once the election is past. 

If the potential for a bumpy ride ahead is keeping you up at night, we encourage you to talk to us about your specific risk level so we can adjust that accordingly. Welcome to the fourth quarter and let us all hope for clarity to the elections, a speedy recovery for everyone who is sick, and some positive news regarding the vaccine studies. 

If you have questions, please contact us.

FINANCIAL PLANNING
COLLEGE AND TAX PLANNING
401(k) ALLOCATION
GRAPHIC OF THE MONTH

To download the October 2020 Newsletter: CLICK HERE