As the year 2020 continued on its unpredictable, and at times destructive path, the third quarter managed to push stock prices higher in the face of a global health pandemic, economic recession, and contentious U.S. presidential election. Year to date, the Dow Jones Industrial Average was down a mere 1% as of September 30th, having almost fully recovered from the Spring bear market in stocks. During the quarter, July and August were stellar, while the seasonally weak month of September stayed true to historical form and pulled stock prices lower.
Despite a 35% decline in corporate earnings this year, the stock market has mostly recovered from its pandemic induced March drop (having risen 50% since the March 23rd low). But higher stock prices in the absence of strong business results can be troubling, as it presents an increasingly vulnerable equity market to investors (by way of expensive stock valuations and low dividend yields). Adding to these concerns is the day-trader enthusiasm around high-profile technology stocks. This frenzied behavior harkens back to the 1990’s dot-com bubble, which ended poorly for investors.
Heading into the fourth quarter, there are both encouraging signs and cause for concern. This presidential election is important because the candidates have starkly different views on the topics of taxation, healthcare, trade, and regulatory policies. The President elect will inherit an economy that is attempting to rise out of recession. Recent economic data has been commensurate with a partially opened economy, showing improved manufacturing activity and a strong residential real estate market, offset by stubbornly high unemployment claims. Incredibly, U.S. GDP is expected to have increased by 20% in the third quarter, with credit owed to the Federal Reserve bank and their commitment to 0% interest rates for the foreseeable future.
We have all been asked to summon great resilience during this challenging year as we face various forms of adversity in our lives. The global pandemic has forced companies and their employees to make dramatic changes to how business is transacted. In the words of Microsoft CEO Satya Nadella, “we have seen two years of digital transformation in two months.” In addition to the stress of the health crisis, financial markets have exhibited significant bouts of volatility, reminding us more than ever the importance of a long-term investment horizon, paired with a thoughtful financial plan.