Q2 2020 Market
Commentary

Full steam ahead into 2021! The market that is… As we close out a tumultuous year, it is incredible to see how financial markets behaved in the face of adversity. In a year where personal lives were upheaved and uncertainty seemingly peaked, it is safe to say that positive portfolio returns are a bright spot amongst all the angst. The S&P500 at its low point in March was down -30.7%, and yet the index closed the year up 16.3%. Globally, stocks followed suit, fueled by a late surge from Emerging Markets. The MSCI EM Index gained 19.3% in Q4 alone to close the year just shy of a 16% return. Bond markets (traditionally less volatile than equities) behaved more like equities than true “fixed income” as the Bloomberg Corporate High Yield index plummeted down -19.8% and recovered to close the year up 7.1%. As the economy “re-opened” for business throughout Q2 and Q3, it became evident that the equity market is still very much a forwardlooking instrument. The prevailing trifecta of hope has been a fully open economy, government stimulus, and an effective and safe Covid-19 vaccine. With those three things ahead, the market rallied with almost no reaction to the Fall/Winter reemergence and rapid spread of the virus. Investors appear confident that we are nearing the end of the tunnel and that by Spring 2021, things may be more normal. 2020 has been nothing short of astounding. With all of that in mind, the social and economic bar seems to be set pretty low, and 2021 is hoping to clear it comfortably.

While we certainly did not expect the recovery to be so swift, we did know there would eventually be a recovery of some sort. The stock market today is much different than in years past. The speed at which volatility can present itself and then subdue is remarkable. That kind of aggressive volatility is something we need to be constantly thinking about moving forward as we allocate and invest our client portfolios. There are more types of market participants than ever. Algorithm traders, institutions with strict mandates, buy and hold investors, hedge funds, and the emergence of “Robinhood” traders (young investors mostly trading on momentum instead of fundamentals). Every one of these participants has some impact on the way the market behaves, and in the end, the different approaches tend to smooth out returns. This year more than any in recent memory, will serve as a case study in market timing and why we believe that most timing involves a significant degree of luck. We know that when market valuations are high, we should look to trim profits, and when market valuations are relatively low, we should buy, but the exact timing is typically not worth chasing. What is more impactful is planning ahead. Planning for a range of outcomes in the market and then matching the goals of an investment portfolio with the right allocation to maximize returns relative to risk. Let the market do its job.

So, are these market gains sustainable if we are truly in a recession and no Covid-19 vaccine is readily available? There’s an argument to be made that the rise in America’s wealth gap can continue to spur this growth, because at the end of the day, who is driving the market? It’s not the 14% of the population that is unemployed and it’s not the small businesses that are closing their doors. We believe It’s the massive public corporations, pension funds, endowments and the wealthiest Americans who are driving the rally. It is estimated that almost 70% of stock trading volume is accounted for by institutions (according to SmartAsset). This points back to the segmentation of the sectors that we like to discuss as well. Big tech, ecommerce, delivery services, and cloud computing companies among others are gaining strength by the day in this “new world” we are living in. Old retail, on the other hand, was already under severe pressure and this quarantine/ social distance

lifestyle has simply expedited that process. It’s conceivable that we continue to see growth buoyed by individual segments of the economy rather than broad growth across the table. In other words, a smaller group of very big corporate winners, carrying the load for the larger group of those unfortunately on the other end.

This past quarter has highlighted many investment theories to remember, a few of which we would like to highlight. Markets are very challenging to predict, and timing them perfectly is even tougher. Implementing a long-term plan can help ease short term tensions due to volatile fluctuations. Diversification is prudent, and dollar cost averaging (implementing fixed amounts of cash into the market over time) is a great strategy! In our equity portfolios throughout this quarter, we took steps to re-implement cash back into the market via a dollar cost averaging strategy, and it has paid off. We are fairly certain that volatility will continue this year, but you can never know for sure what is ahead, and implementing capital overtime has its benefits. This is a strategy we will patiently continue to implement until all cash is fully back to work. In fixed income, this quarter more than ever highlighted the strengths of how we as a firm execute in bond markets. As mentioned in previous commentaries and conversations, we predominately gain fixed income exposure through directly owning individual bonds. Doing so this past quarter allowed us to hold onto positions through the downturn, knowing that price fluctuations are part of the process, but the main objective of the fixed income portfolio is the income stream. In addition, we were able to take advantage of dislocated markets and buy bonds cheaper to add to the portfolio. It’s never easy to watch markets fall, but we are very confident in our team and our ability to best navigate these environments for our clients

Looking forward to the remainder of this year, we believe further volatility is likely, but that we will ultimately end the year higher than where we are today. Extreme measures of social distancing have been necessary to slow the spread of Covid-19, but at the detriment of the economy. The path out still remains unclear. Even now, as states continue to re-open stores and restaurants, we’re already seeing headlines of cases beginning to spike again around the country. We continue to monitor all news as it comes out, and factor all relevant information into our collaborative investment decisions. We still hold an allocation to cash and gold in portfolios that we will use as a hedge as well as for buying opportunities. Please don’t hesitate to reach out to anyone on our team during these challenging times. We are here to instill confidence in you and your families that your wealth and hard-earned savings are in great hands. Stay tuned in the coming quarters as we navigate a political landscape and presidential race that is sure keep us busy