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October is Over – Time to Rotate and Rebalance
Dear Great Lakes Wealth Clients & Friends,
The market through October continued to make the case for a steady approach to investing, especially as we find ourselves in a historically volatile time – the months surrounding a U.S. presidential election – amid a historic, complicated year.
In general, we remain optimistic, even as the market has experienced mixed news dominated by the pandemic and the responses to it.
Improving economic activity and promising corporate earnings helped the S&P 500 start to climb out of its September gloom. However, those gains were met with increasingly concerning reports of a third wave of COVID-19 outbreaks across the U.S., with a record rate of new cases reported, and a resurgence of the virus in Europe. It all feels a little one step forward, two steps back – but that has been the case for most of 2020.
As a result, the S&P 500 has closed lower for the second consecutive month. But, despite the decline in equity prices, the credit market has shown little sign of stress.
Fiscal stimulus remained a hope, but as the month continued, investors’ expectations seemed to cool, adding to government-related uncertainty as the election drew closer.
If President Donald Trump is reelected, we could see a package before the December 11 government funding expiration date. A victory by Joe Biden may result in a larger package, but it may come in stages through the early part of 2021. We believe the biggest market risk is a prolonged, uncertain or contested election.
Though October ended with broad reductions across the mainstream market indices, it’s important to remember that even with the uncertainty and volatility of the year, investors have managed to hold the line, showing an optimistic, if cautious, view of the future. Here are the numbers:
| 12/31/19 Close | 10/30/20 Close | Change | % Gain/Loss Year to Date | |
DJIA | 28,538.44 | 26,501.60 | -2,036.84 | -7.14% | |
NASDAQ | 8,972.61 | 10,911.59 | +1,938.98 | +21.61% | |
S&P 500 | 3,230.78 | 3,269.96 | +39.18 | +1.21% | |
MSCI EAFE | 2,036.96 | 1,780.08 | -256.88 | -12.61% | |
Russell 2000 | 1,668.47 | 1,538.48 | -129.99 | -7.79% | |
Bloomberg Barclays Aggregate Bond | 2,225.00 | 2,367.17 | +142.17 | +6.39% | |
| Performance reflects price returns as of market close on Oct. 30, 2020. MSCI EAFE and Bloomberg Barclays Aggregate Bond values represent Oct. 29 closing price. | ||||
And here’s a brief look at some other points of interest across the economy and the world:
Gross domestic product rebounded in third quarter
The gross domestic product saw a record increase from July through September, reversing about two-thirds of the plunge it took in the second quarter. Housing and durable consumer goods made up the bulk of the gain, with the service economy continuing to struggle.
Corporate earnings above expectations
There are good reasons to see the recent pullback as an opportunity to buy while keeping in mind that volatility could remain high in the near term. With about one-third of earnings season to go, third quarter earnings results have come in well above expectations, leading to a 13.4% increase in full-quarter estimates so far.
Fixed-income investments snap back to safety
The election, the pandemic and their economic consequences have spurred uncertainty among fixed-income investments, as well. Yield curves steepened through the month as investors seemed to get comfortable with the idea of forthcoming stimulus and reacted rapidly when those expectations diminished. The 30-year versus 1-year Treasury retracted swiftly as we saw a return to safe-haven investments.
European and Asian markets show different virus impacts
European market indices have taken a hit as new restrictions are implemented and fears about the economy have risen. In Asia, led by China, markets are trading flat-to-upward as pandemic concerns abate.
As international equity markets typically remain more lowly valued than their American equivalents, this highlights a potential diversification role they can play in investors’ portfolios.
European Union carbon law moves forward
Pending European Union legislation that would set a net-zero carbon dioxide emissions target of 2050 was approved by environment ministers this month. The law would also expand the current decarbonization requirements for 2030. A final decision will be made December 10 and 11.
The bottom line
In a normal year, it’s not uncommon to see the S&P 500 experience three or four pullbacks of 5% or more. As fatigue about COVID-19 and the election diminish, we expect to see the market focus more closely on fundamentals, which we believe will improve as we move into 2021.
- The markets will continue to digest the U.S. election results to watch stimulus package developments in Washington.
- Don’t be surprised to see an increase in volatility after the U.S. elections. While emotions may run high, we would use weakness as a buying opportunity. We plan to rotate and rebalance.
- Economic indicators suggest continued, if tempered, economic improvement.
- Gold has broken thru $1,900 and recently touched $2,000 oz. We expect to see continued higher prices, to $2,300+ per ounce.
- Depending on your timeframe, current investment strategies should be based on what’s happening “Now,” “Next,” and “Later.”
- We currently have a “Buy” on 10 of our strategies. Which one(s) is right for you? That just depends on your risk tolerance, ultimate objective, etc.
- Our current approach continues to be discipline and patience when both buying and selling. Volatility creates opportunity.
We hope this message finds you well. Thank you, again, for the trust you have placed in us. If you have any questions or concerns, please do not hesitate to reach out.
If you would like information on becoming a Great Lakes Wealth client, please call us at 248.378.1200.
Sincerely,
Your Investment Team at Great Lakes Wealth