Despite some weakness in September, U.S. and foreign equity markets posted solidly positive returns for the third quarter. Stocks were buoyed by continuing economic recovery and low interest rates.
While the market rebound from the March 23rd low has been broadly based, U.S. large capitalization stocks have certainly been in the vanguard. As of this writing, indexes of these “blue chip” stocks are only 2% below record highs reached on February 19th. Benchmarks of smaller company stocks and foreign stocks are still 5-8% below record highs reached earlier this year.
Time vs. Timing
As explained in prior commentaries, stock prices and economic performance are rarely synchronized. The former almost always leads the latter. This has been true in 2020 just as it was evident in prior business cycles when stock prices rebounded in advance of meaningful recovery from recessions in 2009, 2001, 1990, 1982 and 1974. This is why it is so difficult to “time” the stock market. A Bartlett favorite saying bears repeating: “time in the market” is much more reliable and impactful than “market timing” for long-term investors.
The latest monthly labor report showed a fifth consecutive month of hiring. The unemployment rate measured 7.9%. This is good news, a noteworthy improvement from a spike to near 15% unemployment after lockdown measures were implemented earlier this year. Yet the pace of job growth has waned recently, and there is considerable room for improvement to the “full employment” that prevailed in January, when unemployment measured at a 50-year low of 3.5%. This is consistent with other barometers of economic progress, such as monthly manufacturing surveys, which remain in an uptrend but have recently moderated. Meanwhile, renewed containment measures are now being implemented in cities and countries experiencing worsening infection rates. While these precautions are necessary, they will exact a drag on the global economy.
What does this mean for investors? First, it makes very low interest rates likely for at least the next few years. This has been and should continue to be a support for stock valuations. Second, it means another federal stimulus package will probably be coming soon. The forceful monetary and fiscal strategies implemented here at home and abroad have been impactful thus far in shoring up otherwise very fragile economic recoveries, and more help seems necessary. This is especially important for industries under severe stress, such as aviation and hospitality.
Profits and Politics
Stock prices roughly parallel business results over the long haul, rising in tandem with higher corporate profits and dividends. Historically, significant progress has occurred under both Democrat and Republican administrations. In fact, divided government has been the norm in the post-war era. Bull markets sometimes credited to the Eisenhower and Reagan presidencies also overlapped with Democrat majorities in Congress. By contrast, great stock market performance during the Clinton and Obama presidencies coincided with GOP control of Congress. While we factor election possibilities into our research of specific industries, mindful of different tax or regulatory priorities, we do not anticipate major changes in asset allocation. Most important, regardless of the election outcome, we expect great companies will continue to produce higher profits and dividends.
So much depends on progress in developing and commercializing a coronavirus treatment or, even better, a vaccine. More than fifty research and development programs are in process. Success will determine whether we return to more sustained economic growth and full employment or experience more tenuous progress requiring ongoing government stimulus.
For investors, a “return to normal” would favor stocks in sectors that have been more compromised by the pandemic. Financial Services and Industrials would be among the beneficiaries. By contrast, a more fragile economic recovery, constrained by containment measures or uneven medical progress, would favor companies in sectors such as Consumer Staples, Health Care and Technology. Bartlett believes a well-diversified portfolio should feature adequate representation in all major sectors, rather than being exclusively geared to either an optimistic or pessimistic scenario.
We continue to emphasize quality companies, many featuring solid and rising dividends, with a preference for stocks we expect to be relatively resilient if there is another setback. This reflects our goal of delivering “all weather” performance, participating nicely in rising stock markets and holding up well in difficult periods. We know this will help our clients avoid the very costly “behavioral penalty” of reactively selling stocks at low prices during occasional market shakeouts. While interest rates are likely to remain very low, we will also maintain appropriate bond and cash positions. These are critical asset allocation safeguards, especially for clients relying on portfolio distributions. Furthermore, the balanced investor can use less-volatile holdings as a source of liquidity for stock purchases in the event of a selloff, so that market setbacks can be times of opportunity rather than peril.
We are very grateful for your business, a responsibility we always cherish but especially now as we navigate unusual challenges. We are tracking at almost 99% client retention for 2020 and have been steadily adding new relationships. We hope you will recommend Bartlett to family, friends and colleagues who could benefit from our financial planning and investment management services.
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