What could grab headlines away from the killing of a top Iranian general, a very public oil production dispute between OPEC and Russia, and even the Presidential election? The global pandemic was the top story of 2020 and continues into 2021.
After taking hold in the United States in February, the pandemic led to the fastest bear market in history. The S&P 500 dropped 34% in just 33 days. The New York Stock Exchange closed its floor to trading (the exchange was open, but traders were executing remotely) on March 23rd, pinning the tail on the exact bottom of the bear. This was the shortest bear in history, returning to the previous peak less in less than 6 months. Markets remained reactive to pandemic news intra-day while grinding higher through the second half of the year. FDA approval of vaccines escorted the S&P 500 to an all-time high to close out the last trading day of the year. This is the first time the S&P 500 posted a double digit return (+18.4%, including dividends) for a calendar year after such a significant drawdown.
Experts debated what the recovery would look like. Few expected an immediate return to normal which would make a chart look like the letter V. Similarly, there were few perma-bears bold enough to call for an L shape with little recovery at all. The actual recovery has taken the shape of a K, with distinct winners and losers. Selected industries saw not only a swift and full recovery, but have thrived during the shift to the remote workplace. Other industries (travel and leisure, in particular) remain crippled.
US large cap equity markets hit all-time highs in November as the Dow Jones Industrial Average crossed 30,000 for the first time. These round numbers get easier to hit as the index values increase. The Dow’s increase from 10,000 in March 1999 to 11,000 in May 1999 was a 10% move. The increase from 29,000 in January 2020 to 30,000 in November 2020 was a move of 3.4%.
Large Cap Growth stocks have dominated 2020, but we saw a bit of a rotation in November, as Small Caps, Value, and Developed International stocks outperformed. The energy sector led the way with a whopping 28% return for the month, but perspective is in order as energy is still down 36.5% on the year.
The average snowfall for December in Cleveland is 14 inches. However, the last two Decembers only brought us 8 inches total. On the first day of December for 2020, many Clevelanders saw a foot of snow or more. Lyndhurst topped Cuyahoga county with 22 inches. That is the story of averages. We don’t get 14 inches of snow every December and that 14 inches isn’t distributed in half inch daily accumulations across the month.
It is with profound sadness that we inform you of the sudden passing of our partner, friend and colleague, Terry Waye, this past weekend. Words cannot express the loss that we all feel and the sadness we have for his family and friends.
Terry joined Fairway in 2006 and became a partner of the Firm in 2016. From the day he joined us, there was never a doubt when Terry was in the office, as his booming voice and laugh carried throughout our halls. In addition to his skills as a planner and advisor, Terry had a unique ability to connect with people in a very personal way, sharing his true compassion for each of us as individuals, not just as clients and colleagues. Every relationship was deeply meaningful to him.
What Terry will always be remembered for however was his utter devotion to family and friends. We mourn with his wife Debbie, his sons Alex and Ethan, and everyone else who had a personal connection to Terry. Your thoughts, condolences, and prayers are welcomed and appreciated by the family and all those who held Terry dearly.
The family is accepting friends at the Ferfolia Funeral Home, 356 W. Aurora Rd, Sagamore Hills, OH for visitation on Friday 11/6 from 11:00 AM – 3:00 PM, as well as at an open house to celebrate Terry’s life on Saturday 11/7 starting at 2:00 PM, at 771 Silverberry Lane, Hudson, OH.
The S&P 500 gained 8.9% during the third quarter, putting its year-to-date return at 5.1%, while other broad stock indices gained between 4% and 9% for the quarter but remain in negative territory through the first nine months of 2020. A moderate asset allocation is likely up between 2 and 4% for the year.
The third quarter saw a sharp rebound in US economic data. US GDP made headlines after dropping 31.4% in the second quarter. JP Morgan expects GDP to rise 35% in the 3rd quarter. This doesn’t get the economy back to its pre-pandemic size (that would take a 53.3% jump in Q3 GDP). It does indicate that the sharp pain of the pandemic may be relatively short-lived. Similarly, of the 22.2 million jobs that were lost over the course of 2 months, 11.4 million have been regained. The unemployment rate dropped from 14.7% in April to 7.9% today. Some are calling this a ‘K’ shaped recovery as sectors like technology have recovered well, but leisure, hospitality, and retail continue to struggle.
Testing for the pandemic increased from about 600,000 tests per day at the end of June to about 1 million tests per day now. Hospitalizations stood at about 35,000 at the end of the second quarter, peaked at 59,000 in July, and have since dropped to 31,000. There are 11 vaccines in Phase III trials.
Many of us are concerned about how the upcoming election might affect our financial plans. Here are some high-level considerations:
Investment Portfolio Management:
1. Elections can trigger an impulse to time the market. They are an event we can see coming, unlike a surprise pandemic or natural disaster. An attempt to time the market might be prudent if we knew the outcome, in advance, and more importantly if we knew the timing and effect it would have on the financial markets. Unfortunately, no one knows, which means any attempt to win-more or lose-less around an election is questionable. It is also mostly unnecessary for long-term investors as short-term market moves smooth-out over time.
2. Short-term volatility is the price we pay as investors to “earn” the expected higher returns offered by stocks. In other words, you must be in the market all the time to deserve the returns it promises. Once you start going in/out, you have broken the “deal” with the market and your outcome will no longer be as reliable as it would have been if you stayed invested.
In early 2018, the Securities and Exchange Commission (“SEC”) issued a set of proposals, known as Regulation Best Interest (“Regulation BI”), in an effort to lift the standard of conduct applicable to broker-dealers. Despite thousands of public comment letters, rule revisions, and a lawsuit against its implementation (which is still pending), compliance for this new regulation took effect June 30, 2020.
So, what exactly is Regulation BI? Under the regulation, broker-dealers will have a general obligation to “act in the best interest of a retail customer when making a recommendation of any securities transaction or investment strategy involving securities to a retail customer” and such broker-dealers “may not put financial interest ahead of the interests of a retail customer when making recommendations.”
This year, the S&P 500 experienced the demise of one bull market at the hands of a 34% bear. The market rallied furiously since the end of March. Exact dating of bull and bear markets is not a science. Does the bull market start at the bottom of the last bear or does it only start at the previous bull’s peak? Liz Ann Sonders has marked our current regime as a new bull after the S&P 500 hit new all-time highs. She also pointed out that the Consumer Discretionary sector has led the way along with tech. Apple and Microsoft are Tech – Google and Facebook are Communication Services – Amazon is Consumer Discretionary. Tech is up 76.23% since the bottom. Communication Services is up 52.66% and Consumer Discretionary is up 76.22%.
Something to keep an eye on: The Federal Reserve is no longer shooting for 2% inflation, but 2% average inflation. At the recent (virtual) Jackson Hole meeting, Federal Reserve Chairman Jerome Powell said very deliberately:
“…our new statement indicates that we will seek to achieve inflation that averages 2 percent over time. Therefore, following periods when inflation has been running below 2 percent, appropriate monetary policy will likely aim to achieve inflation moderately above 2 percent for some time.”
Don’t look for the Federal Reserve to micro-manage around the magic 2% inflation number. The statement also leads us to expect lower interest rates for longer.
The current bull market is already four times as long as the last bear market. The last bear was merely a month old when it expired. The current bull market is 4 months old. Is this the real deal? Pre-pandemic, there was worry that the market was too expensive or (ugh) long in the tooth. After the 30% drop, did anyone predict a 47% rally? Now the worry is that the stock market didn’t suffer enough. Tell that to small cap, international, and real estate investors who are still climbing back out of the hole.
GDP was down 9.5% for Q2 (-32.9% annualized). Estimates expected a drop of 34.7%, annualized. This is the largest quarterly drop in GDP since 1958 when the United States was hit with Asian Flu. Most of the economic damage was done early in the quarter. In fact, economists at First Trust calculate that if industrial production doesn’t grow at all from where it’s at now, Q3 GDP will be UP 17% versus the Q2 average. The economy has been hurt, but it is mending.
Not including dividends, the S&P 500 was down exactly 20% in the first quarter. It was up 19.95% in the second quarter. Down 20%, up 20%. If you think 2020 has been a joke of a year so far, it seems the stock market is in on it.
This is a time where you will see dumb people getting rich. The media loves stories about college kids running hedge funds out of their dorm rooms or ‘Davey Day Trader’. Remember this is media, not journalism. A similar experience happens at social gatherings. I wear a mask to protect against spreading illness, but there’s nothing to protect against people who discovered the Robin Hood app (basically a brokerage account where you can trade fractions of shares) and want to brag about how good they are. The Robin Hood trader may hit a home run and turn $500 into $2,000. Great, but that’s not wealth. If it were typical of the portfolio’s investment results, they would be telling me about this from their private island. More than likely, the trading activity is a net negative, but represents such a small portion of the portfolio that it is negligible. For them, the risk of underperformance is worth the chance to talk up the wins (even if they are just playing the penny slots).
Before our monthly commentary, I’d like to address the question we’ve gotten most often: How are the folks at Fairway doing? It is humbling to be in your thoughts, especially in times like these. We are doing well and are fortunate to have been able to transition to a work-from-home stance relatively seamlessly. It may feel like time has slowed over the last months, but life has not stood still. When we return to the office, not only will we be celebrating several missed birthdays, but one of us will be returning as a new parent and another as a new grandparent!
Fairway remains committed to proactively applying our expertise as stewards of our clients’ wealth. We pride ourselves not only on the quantifiable results of our efforts, but also the peace of mind our clients enjoy. As always, if anything has changed in your financial situation or if you just want to talk, reach out to us. Chances are, we’ll be reaching out to you soon, too.