Given the number of unprecedented events this year, we are reminded of an old quote: “There are decades where nothing happens, and there are weeks where decades happen.” Well, 2020 will go down in history as the year where decades have happened.
We have written extensively about the impact that the pandemic has had on the economy, but over the last several months, stocks have exhibited surprisingly low levels of volatility. As global economies have re-opened and the economic rebound has taken hold, markets have moved higher every month since the substantial bounce-back in April, with August being better than the three months that preceded it.
There has been a directional change in September, however. A few factors could have led to the sell-off so far this month. Uncertainty over the November elections and the possibility of a contested election with the outcome not known until well beyond November 3rd are clearly causing investor anxiety. Additionally, the virus’s spread across Europe and the concern about a pick-up in U.S. cases have added to the selling pressure.
Jay Powell, the Federal Reserve Chairman, has called for additional stimulus to help the U.S. economy, but that assistance seems somewhat unlikely in the foreseeable future. The political environment required to pass legislation seems to have worsened after the recent death of Ruth Bader Ginsburg and the pending battle over the next Supreme Court Justice.
It is worth mentioning that the technology sector and other high growth/high valuation areas of the market have experienced the largest declines this month. Other categories, such as smaller companies, international and value-oriented stocks (financials, basic materials, industrials, etc.) have held up much better. No one can accurately predict whether the current downturn will be short-lived or if it will be with us for a while, but we know that investors must have patience during times of volatility. Historians will say that “markets always climb a wall of worry,” and we seem to be experiencing more uncertainty than normal—health concerns, political divisiveness and the economy to name a few.
It is possible that many of the areas causing the current uneasiness will begin to clear up in the months ahead, and then there will be other reasons to worry. While unemployment is still elevated, it has started to come down, as one-half of the jobs lost during the March – May time frame have been recovered. The month of September notwithstanding, the stock market has been resilient and most of the ways that economists measure improvement (leading economic indicators, consumer confidence, housing, retail sales, etc.) have been trending higher.
In summary, if you’re looking for bullish arguments, you can find plenty of them, and if you’re looking for bearish arguments, there is no shortage. Market “corrections” are not necessarily a bad thing every now and then as they prevent bubbles from forming. After a multi-month disappearance, volatility is back, and it’s probably here to stay for a while.
We would encourage you to not get too caught up in the daily movements of the market. We realize that this is easier said than done. An investor’s time horizon is among the best tools in the toolbox. We will continue to monitor all the moving parts and will keep you informed along the way. Thank you for trusting us to manage your assets and to navigate a very challenging environment.