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Fourth Quarter 2020 Market Commentary

I found a nice little feature on my social media accounts that blocks political adds before the election adds started coming in full force. This feature has saved me from some of the rhetoric coming from all sides of the debate. The potential for election lawsuits, the replacement of a Supreme Court justice, continuing coronavirus concerns, and the start of flu season are all factors influencing the markets. It is important not to focus on just one or two issues but instead on planning and building portfolios that will withstand the inevitable changes that occur over longer-term horizons and positioning ourselves to weather the shorter-term volatility. Whatever the outcome of the election and the resultant movement of the overall market, good businesses will recover from short term moves. Keeping a steady hand during volatility has consistently been the key to successful investing.  
 
Having spent nearly three decades working in the field of professional investing I have found there are nearly always opportunities to profit. There are never guarantees and past performance is not a guarantee of future results. However, keeping consistent and executing on well thought out plans specific to the individual investor has served us well over the years. Below are the topics we will cover in this quarter’s commentary.

  • Fiscal Stimulus
  • Governmental Stimulus
  • Where Do We Go From Here?

Fiscal Stimulus 
How far can it take us and what are the potential investing implications?


Jerome Powell of the Federal Open Market Committee (FOMC) essentially told us that he believes fiscal stimulus has taken us as far as it can. Zero percent interest rates have dramatically impacted new and existing home sales encouraging those who could afford it to buy or refinance. These lower rates have also inspired many to take out larger mortgages or home equity lines of credit. The proceeds from these additional loans have further stimulated the economy. According to the National Association of Realtors, home sales have not been this high in more than ten years despite a record-high unemployment rate.  
 
For those investing for income to supply their daily needs, the fixed income market has not produced the expected income and downside protection it did in years past as the ten-year treasury rates plummeted to their lowest levels in history. There are a few ways to deal with this issue. One is to do nothing in hopes that your resources will outlast this period of low rates (hope has never been a good planning strategy in my experience). Another is to exit fixed income in favor of the equity market often significantly increasing the risk profile of your portfolio. Instead, we favor a proprietary innovative balanced approach. We recognize the positive role that careful investing in the equity market can play while combining market innovations that have taken place over the past decade which can provide some downside protection and income for those that need it.
 
Governmental Stimulus
Will it come? Will it be enough? When will it arrive?


 I am sure most readers are aware of the trillions of dollars that have been pumped into the U.S. economy by federal and state governments since March of this year. The government has supplied everything from making payments on loans for small businesses, cutting checks to every U.S. taxpayer, issuing forgivable loans and additional unemployment money which has kept the economy afloat. Just as I release this note, many of those programs end abruptly on October 1st. Foreclosure and eviction clocks begin to tick rapidly down unless some form of stimulus is injected into the economy. Meanwhile, the election process keeps the proverbial waters muddy with competing agendas on all sides.
 
We believe there will be additional stimulus measures taken. The timing and structure of those measures may cause significant damage, particularly to the small and midsized businesses that form the backbone of our economy. One example of the economic impact of shutting down economies is the travel and tourism industry which, according to Statista.com, contributes about $1.1 trillion directly to our domestic economy. These statistics also do not include all the other industries that feed the travel and tourism industry indirectly. Many hotels and restaurants have already closed indefinitely. Keep in mind that all those businesses that close pay taxes as do their employees. We believe that no matter which political party gains power during this election, taxes will increase in some form or fashion.
 
Where Do We Go From Here?


As always, we are long term, consistent investors, and strongly advise against the timing of any market. Remember, to be successful at timing the market you must be right twice. Once on when to exit and the next time on when to re-enter. While many may claim to have “called a market bottom or top”, few or none can accurately claim to have done so consistently over several market cycles. 
 
We expect the choppy markets we saw this past month to continue with possible strong moves around the election and surrounding the voting on the various stimulus packages. A shift of power to the Democrats away from the narrow Republican advantage may cause a downdraft in the markets as fears of higher corporate and personal tax rates swirl through the heads of investors.  
 
We remain long-term bullish on the U.S. markets which we believe to be better positioned than international markets in general. As mentioned in last month’s update, we particularly like the strong innovation theme that we think will help aid in whatever the “new normal” turns out to be. We expect that innovations along with strong governmental and FOMC support will eventually move the market in a positive direction. We stress that stock and sector selection will continue to play a large role in the success of long-term investors. We could be wrong if political officials delay too long or fumble the execution of a stimulus plan. 
 
Therefore, we keep cash and downside protection in place. Despite what most U.S. citizens see on the news, the U.S. was far from the worst impacted economically by the pandemic and therefore we are more cautious regarding our foreign holdings. The argument that the U.S. dollar is falling and may fall precipitously against other currencies is not a significant concern for those whose bills are paid mostly in U.S. dollars. Further, we believe that any potential currency gain against the U.S. dollar could readily be outweighed by an outsized negative pandemic impact on foreign economies.
 
For those looking for a second opinion or have questions about any of the notes above, schedule a call with us by clicking here.