Crown Investment Committee: Q3 2020 in the Books
Every quarter the CWG Investment Committee takes a look back at the calendar year and reviews what has taken place in the economy and markets. We do our best to gauge the risk and opportunities present in the markets as we march forward with investments. Needless to say, with nine months gone, 2020 will go down as a truly exceptional year.
The S&P 500 index hit its all-time high in mid-February and then plunged 34%, bottoming out March 23rd. In the face of a swooning economy due to the pandemic shutdown, the index erased all losses and was flat by June 8th. The SPX then reached a new peak of 3,580 on September 2nd. As of September 30th, the index finished +4.09%. The DJIA finished -2.65%. S&P Mid Cap 400 was -9.78% and S&P Small Cap 600 was -16.25%, according to S&P Dow Jones Indices, LLC.
COVID benefiting sectors like technology and consumer discretionary have done very well while energy, banks and real estate are down sharply YTD.
Four companies - Apple, Amazon, Google and Microsoft are now 21% of the index and accounted for much of its yearly gain. Ten-year Treasury notes yield 0.79% today. Government debt at the end of 2020 will be the same percentage of the economy that we had in 1943, the end of WW2. Estimated U.S government debt as of September 30th is USD 26.7 trillion, which now exceeds the size of the economy, USD 22.3 trillion.
Major concerns are the following:
1. Timing of a Coronavirus vaccine and or effective treatment.
2. November election outcomes.
3. When will we have a full opening of the economy?
4. Types and timing of more government stimulus.
As far as vaccines go, we have several large companies doing late stage Phase 3 studies, including JNJ and Pfizer. Results of those trials will become available before this year ends, but a rollout and acceptance by the public may be slow.
November elections are upon us with voting already started in many states. While many polls show former Vice President Biden with a clear national lead, swing state votes will determine the winner.
Since we depend on the Electoral College rather than a popular vote, a close result would not be surprising. A tight outcome has some pundits worried about a contested outcome dragging on for months beyond November 3rd. With record numbers of mail-in ballots due to the pandemic, a delay in results is likely.
According to the Wall Street Journal, when the SPX has risen 3 months before the election, the incumbent party has won. When the SPX has fallen in the prior 3 months the incumbent party has lost. This trend has only been broken 3 times since 1928. The SPX is currently up 3.4% from the August 3rd close.
Needless to say, 2020 is a very special year.
While markets generally rally after election results are announced, a Democrat sweep would not be welcomed by most investors. Higher taxes and more regulations are important concerns. However, according to data from Capital Group, the S&P 500 has fallen only twice in the first 12 months following election day since 1980, regardless of which party wins.
As for the economy reopening fully, everything depends on an effective and acceptable vaccine.
Our understanding is that the first vaccine is not likely going to be the best one, so any rollout will take time until the public has overcome fear about side effects.
As we await all this important news, many Americans are running out of resources, while others are coping well. Household spending has recovered 75% of its decline, largely due to federal stimulus and unemployment benefits. Unemployment is now at 7.9%. Savings rates have reached 14%.
As of today, negotiations for more government stimulus from Congress have been halted.
Big business is adapting far better than small business to the shutdowns and pandemic. Analysts at FactSet report Q3 bottom up EPS estimates increased for the SPX 4.1%, while the index rallied 8.5% during the quarter. Actual earnings declined by 22.4% in Q3. Ed Yardini sees $120 in 2020, $155 for 2021, and $180 for S&P 500 forward earnings. At 3,406 on the index we sit at a forward P/E of 21.9x near the top end of the historic range.
The Fed promises lower rates for the foreseeable future and a +2% inflation bogey. The risks of too much money chasing, too few liquid investments in a zero-rate environment, may result in a bubble. Some believe this is happening in bonds, and technology stocks.
We are happy to review your accounts with you whenever you desire, particularly if your circumstances have changed.
We wish you a happy and healthy fall season.
All the best,