October 8, 2020

This is the third quarterly commentary in which the coronavirus takes center stage. The pandemic has impacted our society, economy, health, markets, politics, and all levels of government. We do not know the longer-term impact of the shutdown on businesses, whether additional fiscal stimulus will be provided, the outcome of the November elections, nor the timeline for a return to normalcy from the pandemic. Also, it is difficult to anticipate what the new “normal” will be going forward. With this backdrop, we encourage our clients to maintain steady nerves. We are here to counsel you on any appropriate adjustments to your investment plan, while always maintaining a long-term perspective.

Despite high levels of uncertainty, the domestic equity market, as measured by the S&P 500 Index, rose nearly 9% in the third quarter (after declining almost 21% in the first quarter and rebounding dramatically in the second), resulting in the market being up 5.4% for the year. Projections for the third quarter indicate we experienced a good economic boost as the economy began to slowly reopen, with an increase in GDP growth of 25-35% after plummeting 30% in the second quarter. We expect GDP to flatten in the final quarter of the year.

As we look beyond 2020, we anticipate relatively modest GDP growth of 1-2% over the next few years. Massive fiscal and monetary stimulus have softened the impacts of the pandemic-induced recession and protected financial markets thus far, but these interventions can only do so much. It is unclear whether our country is in a position to self-sustain an economic recovery. As of this writing, a second round of fiscal stimulus may be delayed until after the November elections, which could negatively impact the stock market in the short term.

In the meantime, the liquidity provided by the Federal Reserve appears to have manifested itself in higher stock valuations, particularly in technology/social media stocks. This is underscored by the dramatic bifurcation in the performance of the largest five U.S. companies versus the rest of the domestic equity market. With the performance of the average stock in the S&P 500 Index in negative territory year-to-date, we believe reasonable valuations can still be found for some quality companies.

Regarding interest rates, the Federal Reserve’s extremely loose monetary policy and the recession have pushed short-term interest rates to near 0% and the 10-year U.S. Treasury yield below 1%. With yields so low, we caution investors about taking on risk in the fixed income portion of a portfolio as the modest incremental return may not adequately compensate for the added risk. Cash and fixed income still play an important role in portfolios of providing diversification and defense against equity market or economic volatility.

This is a good time to discuss your asset allocation with us to ensure your portfolio is appropriately positioned according to your objectives and appetite for risk. We continue to emphasize a long-term viewpoint. How you felt in March when markets plunged can help gauge your risk tolerance and inform any actions.

Clifford Swan continues to function on a remote basis until it is safe to return to our in-office operations. We look forward to that day and have developed safety procedures and prepared our offices in anticipation of our return. Thank you for your continued patience as we serve you from a distance. We want to do everything we can to support you in this challenging environment. Should you have any questions or concerns, we welcome discussing them with you. As we approach the holiday season, we wish you health and happiness.

The above information is for educational purposes and should not be considered a recommendation or investment advice. Investing in securities can result in loss of capital. Past performance is no guarantee of future performance.


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