Investors were treated to another favorable quarter as the economy continues to heal. The news around therapeutic treatments and vaccine development for Covid-19 have been generally positive, further supporting investor confidence. Even as higher case counts emerged in several Western states, the U.S. economy has demonstrated impressive resilience in key areas including consumer spending, residential housing and manufacturing activity, which are now above levels considered to be recessionary. In September, consumer confidence experienced its largest gain in over 17 years. Still, it will likely take some time for the entire economy to heal. Unemployment remains high and other segments of the economy, such as leisure and travel, could take several years to fully recover
U.S. Equity Markets
As challenging as 2020 has been on multiple fronts, equity markets continued to move higher over much of the third quarter. The S&P 500 moved into positive territory for the year, with a quarterly return of 8.9%. Even though markets surrendered some gains in September, the S&P 500 closed out the quarter well in the black, with the year-todate return standing at 5.6%. Growth stocks continue to do especially well as the technology and consumer sectors led the charge higher. Small-cap stocks registered gains as well but continue to lag their larger company peers. The Russell 2000 index gained 4.9% during the third quarter though small stocks are down -8.6% since the beginning of the year
International and Emerging Markets
Improving health and economic trends also benefited foreign equity markets during the third quarter, with the MSCI EAFE index returning 4.8% and the MSCI Emerging Markets index up 9.6%. A moderately weaker dollar has helped boost returns for U.S. based investors this year, marking a reversal in dollar strength over the past several years. Currency fluctuations in the value of the U.S. dollar, relative to other major currencies, don’t directly impact prices within the U.S., but can impact the cost of traveling abroad. While a stronger dollar diminishes international returns for U.S. investors, it can make traveling abroad cheaper while the opposite is true when the dollar is falling. Given a reduction in foreign travel this year, U.S. investors may not mind seeing the dollar give back a modest portion of its gains from prior years. That said, the S&P 500 is still in the leadership position so far this year as the MSCI EAFE index has a year-to-date return of -7.1% and the MSCI Emerging Markets index is at -1.2%.
Bonds generated positive returns during the quarter with most shortterm and intermediate-term bonds gaining 1.0% to 2.0%. Credit markets benefited from improving economic fundamentals and a highly supportive monetary policy by the Federal Reserve. Market interest rates are largely unchanged over the past three months, with the 10-year yield near 0.7%. Short-term rates are even lower with most savings accounts, money market funds and CD’s paying little to no interest. This is great news for borrowers, but certainly less favorable for savers, and tends to drive investors toward taking greater risks in fixed income or leaning on stocks more heavily to generate yield and return. This may at least partly explain why stocks have done so well over the past six months. Within our fixed income allocation, we continue to favor a cautious approach and believe it remains prudent to focus exposure in the higher quality segments of the bond market.
Politics and Religion?
It’s getting harder to tell the difference between the two these days. An essential trait of being a disciplined investor, regardless of your political persuasion, is to tune out the noise and avoid the urge to ‘vote’ with your portfolio – a temptation fraught with peril. This is especially difficult in the era of 24-hour cable news, which is designed to excite the nervous system and glue eyeballs. Keep in mind that regardless of which party has or takes the lead in government, the business of America is still business. Apple still sells iPhones and McDonalds will still sell burgers and fries. Investment markets are unfeeling and impersonal with a keen focus on corporate earnings and the direction of the economy. And historically, there has been no meaningful difference in average investor returns with the dominance of any one political party. The past decade has been very reflective of this history. Our best advice is to exercise your vote at the ballot box, but avoid taking investment advice from cable news or Washington D.C.
What's Moving The Market?
As we noted in our last letter, central banks have pumped trillions of dollars into financial markets and directly into the pockets of businesses, individuals and investors. The size and breadth of these combined actions are unprecedented and have had a positive impact on market liquidity, investor sentiment, and the purchasing power of consumers. Since the beginning of the year, the amount of cash and cash equivalents in our economy and financial system has grown by historic measures. For example, U.S. savings deposits have increased by $2.1 trillion to $11.7 trillion, the largest one-year increase ever. Not surprisingly, there has been a high correlation with this style of monetary policy and subsequent price inflation of investment assets. Since April, economic conditions have continued to improve with key areas such as retail sales, personal income, and manufacturing, staging rapid recoveries. Unemployment continues to fall and, for the first time in years, productivity, a key factor of economic growth, is experiencing meaningful gains. Again, other areas of the economy, such as travel and leisure, are likely to take longer to heal. Even though Covid-19 cases moved higher earlier in the third quarter, investment markets continued to rise. We attribute this to lower mortality rates and positive headlines relating to the development of vaccines and therapeutic treatments that are showing promise.
How To Let Investment Markets Work For You
If past market cycles are any indication, the average investor will experience about a dozen bear markets over their investment life span. Investing is like farming in that market cycles provide both planting and harvesting seasons. Earlier this year, we rebalanced investment accounts by purchasing equities at lower prices and when the stock market rises, we can capture some profits and add back to bonds. This practice of continuous rebalancing benefits investors over a full market cycle and can lead to better outcomes than if the market had never experienced any downturns. As we like to say, disciplined and patient investors who follow a sound financial and investment plan are those most rewarded over the long run.
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Confluence Wealth Management, LLC is a registered investment adviser with the United States Securities and Exchange Commission (SEC). Registration of an investment advisor does not imply any level of skill or training. As a registered investment advisor, Confluence Wealth Management is not engaged in the practice of law or tax preparation. As such, you are encouraged to consult with a CPA or tax professional about your individual situation prior to implementing any tax related strategies. Read Disclosures.