Long-predicted volatility showed up like a sudden, fast-moving storm in the final week of October. Election jitters, Congressional failure to deliver a Covid-relief package, new lockdowns in Europe, and a rapid rise in US Covid cases gave investors all the reasons they needed to dump stocks. The carnage was severe, with the S&P shedding 5.6%, the Dow dumping 6.5%, and the tech-driven Nasdaq losing 2.4% in just one week. For the month, all three indexes lost 2% or more.
Among the biggest losers were real estate securities, which tumbled 3.63%, and international developed markets, which shed 3.93%. But there were rays of sunshine too, with the MSCI Emerging markets index gaining 2.06% for the month. Gold held firm at $1848.40 and the Bloomberg Commodity Total Return Index returned 1.41%. Bond performance was uneven, with the US Treasury Bond closing at an 8-month high of 0.88%, while the Bloomberg Barclays (BB) US Aggregate Bond Index fell 0.45% and the BB Muni Bond Index fell 0.30%. High-yield bonds rose 0.51%.
There’s no explaining October without viewing it in context of the see-saw market performance of 2020. Q3 saw blistering growth, the fastest ever recorded in the American economy. GDP climbed 7.4%, equivalent to a 33.1% annualized gain, according to the Commerce Department. In contrast, GDP fell 1.3% in Q1 and plummeted 9% in Q2. Q3 growth made up roughly two-thirds of what was lost in the first half of the year.
Where does that leave investors? Unsettled, to say the least. The election is over, but the defeated incumbent has so far refused to concede the election—or to offer critical briefings to the incoming president. The economy appears to be losing steam with job growth and industrial production on downward trends. Absent the boost of a new stimulus package, large-scale furloughs and layoffs are rising. Worse, skyrocketing Covid infections are inflicting death and economic damage around the world. Absent a vaccine—still many months away despite encouraging news—there is no reasonable way to jumpstart the economy. A stimulus package may be the only hope for cash-strapped small businesses and millions of Americans, many threatened by eviction. Add it all up, and it’s obvious why many economists predict Q4 GDP to sink to 1% to 1.5%. Some believe it will be worse.
This would leave the economy at the end of the year about 2.5% smaller than before the pandemic, and in recession territory. That wouldn’t rival the enormous decline of the Great Recession of 2007 – 2009, when the economy contracted by 4%. But it would be worse than the previous downturns of the 1990s, when GDP fell by about 1.5%, and early 2000s, when GDP fell by 0.3%. And it would leave the economy roughly 3.5% smaller than it was at the end of 2019.
There’s some good news in all the gloom, including a nearly 10% Q3 increase in consumer spending on goods, particularly durable goods like vehicles. And spending on services, which declined by a sharp 12.7% in Q2, rebounded to gain 8.5% in Q3. Even so, the service sector remains hamstrung by pandemic shutdowns, and service-sector jobs are still 10 million below where they were in 2010, when recovery from the Great Recession got underway. With the service sector accounting for more than 60% of GDP and 85% of the employed workforce, this does not bode well for a quick recovery. It is troubling that consumption spending has never even risen to the trend level of growth before the last economic meltdown. Many believe that the economy may not return to normal for years.
Fed Chairman Powell has called for Congress to pass a relief package without delay. So far that call has gone unheeded, but with Biden at the helm the logjam may loosen. Protecting household income and providing relief to state and local governments may be the best medicine to get the ailing economy back on track. That, and an effective vaccine, could right the ship as we head into 2021. But so far, decisive leadership has been absent. That may change after January 20, but for many desperate Americans several months is far too long.
Meanwhile, how should you, as an investor, protect your financial assets? As always, we encourage you to focus on long-term goals and be certain they remain aligned with asset allocation and your diversification strategy. If your life situation has changed in fundamental ways, please contact us for a portfolio review. We are prepared to help with all aspects of financial planning, including mortgage refinancing, reapportioning assets in light of stock gains, and much more. We are also pleased to bring in specialized expertise for estate planning, qualified small business stock planning, charitable gifting, stock option strategies and complex tax issues.
Finally, as Thanksgiving approaches, I want to thank you for your loyalty and referrals to Cardiff Park Advisors. It is gratifying to work with smart and thoughtful people, and I never take that for granted. This is also the time of year to consider how each of us might share our financial resources to improve the lives of others. Rarely have we seen a time of such widespread need. Individual giving can be grand or small, but it all makes a difference.
If you have questions or concerns, please contact me. I am here to help.
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