Market Update – Post-Election Gains May Be Muted

October 8th, 2020 by Jonathan Chatfield, CFA

Since our last update (August 5), certain economic indicators that had prompted us to underweight our allocations in most models have posted minor improvements and the stock market has posted single-digit gains.

  • The stock market has continued its recovery and risen another 2.4%. The S&P 500 has gained 5.5% for the year-to-date.
  • While the economy continues to weather the storm of higher unemployment and economic contraction due to coronavirus-related business shutdowns, investor optimism about a post-crisis recovery has propelled stock prices higher.
  • Additionally, low interest rates have fueled investor interest in dividend-paying stocks to provide retirement income.

 

Subsequent to the drastic slowdown in the first quarter, the U.S. economy has posted encouraging signs of recovery.

  • The unemployment rate, which peaked at 14.7% in April, has recovered to its current level of 7.9% (September).
  • Total economic output, or GDP, contracted -5% in the first quarter and -31.4% in the second quarter (3rd estimate from the BEA).
  • 4th quarter GDP forecasts range from 2.5% to 3.5% and the full year forecast is in the -3% to -4% percent range. In 2021, GDP is forecast at +4%.
  • Inflation remains tame at 1.3%, and the Fed has signaled it intends to keep rates near zero through 2023.
  • Additionally, we expect another stimulus package post-election. Such stimulative economic policies help prevent further economic damage.

 

What does this mean for your investments?

 

With stock prices trading at elevated levels, we have maintained our underweighted equity allocation. We continue to be cautious in our outlook.

  • A quick earnings recovery is priced into current stock price levels, and we believe in an environment of continued economic uncertainty, with low GDP growth expectations, downside risks outweigh the possibility of a continued expansion of p/e multiples. As we experienced earlier this year, market corrections can quickly reduce gains that have taken considerable time to accumulate. We believe in the current market environment risk reduction with emphasis on capital preservation is prudent.

 

 

About the author:

Jonathan Chatfield, CFA

Senior Portfolio Strategist

Mr. Chatfield has over 25 years of experience in the investment management industry.  He currently develops and implements the Anchor Bay Capital’s investment strategy across individually managed accounts.  He holds the Chartered Financial Analyst designation and is a member of the CFA Society of San Diego and the CFA Institute.