The News is Bad, the Markets are Up
What a year. We are living in an amazing time.
If we had told you at the beginning of this year that the S&P 500 would be up 3.5% and the NASDAQ up 25% by the end of the third quarter, you would not have believed us. Heck, we would not have believed us!
COVID-19 has altered, in many ways dramatically, the way that we live our daily lives. It has also had a huge impact on our economy due to decisions made by our government. It is one thing for a Fortune 500 business to have hundreds or thousands of their employees switch to working remotely. However, a local restaurant owner with only a handful of employees cannot go “remote” and cannot shift to a take-out only or partial capacity model without a significant drop in revenues. Small businesses are the backbone of the economy. Economists estimate that there are 30 million small businesses and they provide employment for about half of the American workforce.
During the second quarter, as the economy shut down, economic activity dropped at a 35% annualized rate! During the third quarter, as the economy gradually began to open back up, the economy is rebounding at about the same rate. This will be the fastest increase in real GDP for any quarter since at least World War II.
We have just lived through the strangest recession and recovery we have ever seen. Because it was a government-created recession in reaction to a health and medical emergency rather than an economic issue, we have seen an incredible V-shaped recovery to this point. However, looking forward we do not believe it will continue to be V-shaped from here. The rate of economic growth is going to slow from what it was in the third quarter. Economists predict that it will take several years for the economy – including employment – to get back to where we were in late-2019.
Despite the virus, the lockdowns, election risks and headlines, the stock market has continued to march upward. The primary reason is that aggregate corporate earnings are rising, mostly led by several huge technology companies, and interest rates are near zero.
Ignore the noise. Many economists are predicting that corporate earnings next year will equal or exceed all-time highs. Stock market investors believe that higher profits and lower interest rates outweigh the risks. This is the basic reason that stock prices continue to rise.
With this as background, we continue to be cautiously optimistic and our portfolios are constructed to participate in market advances and cushion market declines. We welcome your questions and comments.