Q3 2020 Firm
Update & Commentary

Three months ago, we said the world was almost unrecognizable, and here we are in October 2020 with much of the same. In reflecting on this past quarter and summer season, we have seen several points of optimism and believe we’re closer to some clarity despite the unusual circumstances. Summer months provided an opportunity to get outside and relax a bit. Indeed, a positive given what 2020 as a whole has embodied so far. In the face of a pandemic, political and social unrest, the market rallied, and the warm months brought a bit of normalcy to our previously fully quarantined country. But with summer in the rearview, this fall season and fourth quarter ahead feel quite different from years past. There’s more tension in the air, shouldered by anxiety and uncertainty surrounding a presidential election, and unprecedented efforts by the medical community to produce a safe and effective Covid-19 vaccine. Many children are “back to school” in some capacity or another, and while some folks are still working from home full-time, others have been able to return to their offices. As the weather turns and Q4 begins, investors and managers alike are working hard to position portfolios for various outcomes in the aforementioned events. We here at CHPW are focused on the challenge as we perform our due diligence and make sure our clients and colleagues are adequately prepared and informed.

In Q3, the U.S. economy partially reopened, and tangible recovery efforts reflected in a continued market rebound. The S&P500 and MSCI ACWI (Global Stock Index) returned over 8% for the quarter in large part thanks to the performance of U.S. equities. High growth sectors like technology, biotechnology, and consumer discretionary led the charge in recovery efforts in a true “stock pickers” environment that we have arguably not seen since 2009. On the other side of portfolios, we look at fixed income, which has been no laggard. The Bloomberg Barclays High Yield index returned over 4% for the quarter as the search for yield in an extremely low interest rate environment continued. When looking back at the numbers, this feels like a great quarter. However, it’s important to note that September brought back volatility. Volatility came as the economy continues to measure further recovery, stimulus efforts, and longer-term effects of the March shut down.

Looking further into financial markets, the S&P500 hit a high of 3588 on Sept 2nd and has fallen roughly 6% since that day. The record stimulus measures taken in Q2 have been mostly exhausted, and we think there is little hope of more stimulus before the election. An additional headwind to equities has been rising inflation fears. These fears have been caused by a massive (and growing) federal budget deficit coupled with accommodative monetary policy. However, with no tangible evidence that the Federal Reserve will raise interest rates for the foreseeable future, we believe typical inflation risk to stocks will be subdued and allow for continued momentum. Continued vaccine news and post-approval distribution efforts will be another event to keep an eye on, as delays may put additional pressure on the economy and sentiment. The lack of political stimulus agreement, inflation fears, vaccine uncertainty, and the likelihood of a contested election drawn out over several weeks or months was enough for some investors to pull chips off the table in the short run. But as we know very well, attempting to purely time the market is a challenging game and not one we are in the business of. Instead, we believe in staying the course for the long-run and making measured tactical decisions to protect portfolios and client capital in the short-run. As we have continued to reiterate throughout this challenging year, proper planning and execution to match your goals are the pillars of long-term financial success.

Now, what about the election? Regardless of what side of the table you sit on, there is no denying this will be a contentious several weeks. We aren’t here to predict an outcome and broadly question folks that will try to. But instead, our goal is to help guide thoughtful investment decisions and reassure our clients that we have a plan for either scenario. We are also taking into account the possibility of a contested and prolonged election. Ultimately, we believe the 12-month outlook for the market is positive regardless of the outcome. If Trump wins, wall street will be happy, and tax incentives will remain. The market would likely respond to that outcome immediately. If Biden wins, there could be some short-term fall out as the market weighs what policy changes will be first up on the table. However, a Biden win also points toward another massive round of stimulus being swiftly passed that would ultimately provide an additional short-run boost to the economy and market. A scenario much like the one we just lived through. The market also seems to agree with this sentiment most recently by holding relatively steady, with most polls looking very tight. In all likelihood, this election will be tough to predict, so we are broadly recommending positioning a portion of your portfolio for short-term volatility while also holding the course in quality core positions for the 12-month outlook. More detail on this recommendation ahead. But what about COVID? Another wrench in the puzzle. Fall and winter could bring a resurgence to the infection rate, but the panic level would likely never reach what we saw in the early stages. The economy will mostly stay open, the playbook for working has been written, and vaccine news will be abundant. In short- COVID is highly unlikely to impact the markets as drastically as it did in Q1. In some ways, we believe the economy will behave similarly to the current professional sports environment. A couple of months back, there was a period of no sports. Now we find ourselves in a moment with every professional sport operating at the same time. We believe the remaining slack (which is significant) will come out of the economy early next year, and potentially find ourselves in a period of exuberance and optimism. We understand things will be forever different in some ways, and there will be nervous moments for everyone, but we are bullish.

In revisiting our previous quarter commentaries and looking forward, we still favor the longevity of equities across industries such as e-commerce, cloud computing, delivery services, home construction, technology, and consumer products. We will continue to hold those types of positions. In addition, we have begun to favor other complementary industries and sectors to prepare for short-term volatility. Consumer staples, large-cap value, and a sleeve of gold are a few ways we are looking to mitigate risk and protect gains in the portfolio. Our models also continue to hold a small portion of cash earmarked to take advantage of buying opportunities. As we saw in March, volatility leads to long-term buying opportunities, and we are ready. In fixed income markets, it has become continuously challenging to find the right bonds as prices have rallied sharply. Back in March, quality companies had bonds sell off to deep discounts, providing many opportunities. Given the way we execute in buying individual bonds, we were able to efficiently take advantage and pick up quality names with high yields and great income streams for our clients. Many of those positions we will continue to hold. Looking forward, we are carefully measuring opportunity costs and credit risks by performing extensive due diligence across the entire fixed-income market. Interest rates will remain low, and that will only push bond prices higher, benefiting bondholders. As always, we can’t stress enough the importance of a well-diversified portfolio. Uncertain times like now are when a proper mix across regions, asset classes, sectors, and industries can provide you comfort and peace of mind.

We look forward to navigating the challenges ahead with much to watch out for in the coming weeks and months. Our team at CHPW is equipped to process the news and events in real-time as they unfold and make the decisions needed for our clients. We are also readily available for any conversations and questions our clients and extended network might have. Our goal is to help guide thoughtful decisions and provide you with comfort that your hard-earned wealth is in great hands. As the election season begins to unfold, there are undoubtedly going to be unforeseen events occurring globally. Stay tuned as we look to keep you up to date along the way with additional commentary and support.

Index returns provided by Bloomberg LP
The performance quoted herein represents past performance. Past performance does not guarantee future results. Investors cannot invest directly in an Index and performance represents gross returns without net fees if any. Chart indicates performance through 9/30/2020 The MSCI ACWI captures large and mid cap representation across 23 Developed Markets (DM) and 26 Emerging Markets (EM) countries. With 2,994 constituents, the index covers approximately 85% of the global investable equity opportunity set

This is for informational and educational purposes only and should not be construed as investment advice or an offer or solicitation of any products or services.  Opinions are subject to change with market conditions. The views and strategies may not be suitable for all investors and are not intended to be relied on for legal or tax advice. There is a risk of loss of principal when investing in securities.   Bonds and bond funds are subject to credit risk, default risk, and interest rate risk and may decline in value as interest rates rise. Advisory services provided through National Asset Management, Inc. (NAM), a SEC Registered Investment Advisor; dba Clapboard Hill Private Wealth

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