17 Nov Quarterly Letter to Clients – October 2020
2020 has been an uniquely odd year for such an even number. We hope you and your family are healthy, safe, and looking forward to regaining some sense of normalcy. It will be most welcome.
The market reacted to this unprecedented health pandemic in the first quarter of 2020 with the fastest 30% decline in its history, followed by the largest 50-day advance ever during the second quarter. Given this backdrop, what would the third quarter hold? a generally quieter market performance quarter of the year. Since World War II, the S&P 500® has increased 0.5% on average in the third quarter, versus rises of 2.0% to 3.8% in the other quarters of the year. Not in 2020! And clearly not surprisingly, given the volatility and uncertainty that preceded it. The major indices ended the quarter on a positive note with returns of: S&P 500® Index +8.93%, Dow Jones Industrial Average +8.22% and the Russell 2000® Index +4.93%.
Using traditional indicators such as Gross Domestic Product, unemployment claims, Consumer Price Index, retail sales, money supply and housing starts as guides to future economic activity is marginally helpful today. Optimistically, their resumed importance is not far off, as every day we move one day closer to getting back to “normal.” A normal that will have lingering effects on how business conducts itself, with new winners and losers. Unfortunately, the “case counts,” stimulus lifelines and the effects of governmental restrictions are having a short-term distortive effect on the underlying capitalistic engine that has driven our economy since the country’s founding. We believe and hope these actions are temporary, and the power and strength of American hard work, creativity and ingenuity will be the long-term drivers of economic results.
The unprecedented $2 trillion CARES Act implemented earlier this year provided a strong shot in the arm to struggling business under pandemic restrictions. More help is being debated in Washington. The Federal Reserve has increasingly been more than standing ready to help by moving well beyond its inflation and employment mandates to purchasing Treasury and corporate debt to provide liquidity and preserve stability in the market. The Fed also indicated rates will unlikely rise until at least 2023, as it continues to keep interest rates targeted at 0%-0.25%.
Vehement partisan posturing is pervasive right now, and half the nation will be disappointed in November. Fortunately, given time-tested structural mechanisms of checks and balances across branches of government, and a legislative reality that change historically occurs at the middle view, we feel some comfort that radical effects on the core values of the nation or our economic system are unlikely.
Successful investing in all periods is an exercise in making incremental adjustments to take advantage of changing situations, when pricing does not make sense and where vulnerabilities or growing risks can be identified. Market extremes and accompanying volatility provide opportunity for patience and adjustment. We remain focused on your behalf in the pursuit of investments in industry-leading companies with clean balance sheets, where investors can preserve and grow their purchasing power over time.
As always, Connors is here for you. Our top priority during this crisis is the health and safety of our associates, clients, visitors and vendors. Our teams are primarily working remotely to practice the recommended precautions to keep our offices safe for everyone. Full staffing of our office again will occur when it is safe and wise to do so.
Our investment professionals are here to discuss your portfolio, make recommendations, manage your accounts, or simply catch up with you and what’s going on in your and your family’s life. We are available if you’d like us to arrange a Zoom meeting, or we’ll be glad to meet with you in person, whether in our office, in your home, or at some other location you choose. Either way, we are here for you, whenever you need us.
On a final housekeeping note —- For those of our clients who attend our annual Open House in November, we’re sorry to say that we will not be holding the event this year. Instead, we’ll look forward to next year’s event, when we can happily, and safely, welcome you all once again into our offices for fun and fellowship and to kick off the holiday season.
Until we see you again, stay safe and be well.
Peter J. Connors, CFA