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Q3 Quarterly Market Review

Donald Calcagni

MBA, MST, CFP®, AIF®, Chief Investment Officer


To view the full Q3 Markets Summary, please click here to download a PDF.

CIO Perspective

Markets enter the homestretch for 2020

What a year it’s been. Markets hit a new high in February, declined over 30% at the onset of the pandemic, and then went on to stage a dramatic rebound from their March 23 lows with the S&P 500 rallying over 50%. The third quarter again saw the S&P 500 hit new highs. Yet market gains were highly uneven; while the five largest stocks in the index returned a staggering 35% for the year through September 30, the bottom 495 stocks in the index returned -3% for the same period.

As we enter the final quarter of the year—and the last month before the U.S. presidential election–wide swaths of the US economy—including millions of American workers—continue to struggle in the face of COVID-19. Here’s seven things you need to know now as we approach year-end.

  • Next year should hopefully see less uncertainty. Much of the uncertainty that cripples us today revolves around COVID-19 and the looming U.S. presidential election. But all crises ultimately have their end. The U.S. election will be resolved in November. Maybe not the night of November 3, but certainly soon thereafter and a new presidential term will begin on January 21, 2021. Similarly, it appears researchers are inching ever closer to finding a vaccine for COVID-19 and with luck we should hopefully see one become readily available sometime in 2021.
  • Earnings should recover in 2021. Economists project GDP growth of 2.7% in 2021. Subsequently, analysts expect a similar recovery in corporate earnings. Consensus estimates put S&P 500 earnings at about $185 per share by the second half of 2021 with the S&P 500 rising 12% to around 3,767.
  • Market performance should broaden in 2021 to include more than just a handful of mega-cap technology stocks. A broader economic recovery should positively affect topline growth and corporate earnings for more companies and more sectors resulting in a much greater broad-based equity market rally than what we’ve seen over the past few years. Moving beyond the U.S., the expansion of the Fed’s balance sheet should continue to put downward pressure on the dollar and subsequently boost non-U.S. equity returns.
  • Rates will stay lower for longer. There are a number of powerful forces keeping a lid on interest rates. The $5 trillion sitting in money markets; the glut of new capital from rising global savings rates; demand for low risk assets; and expansionary monetary policies by global central banks will all act to keep rates lower for longer.
  • Low interest rates and COVID have sparked a rally in real estate markets. Many Americans have decided to flee urban environments in search of greener pastures to #WorkFromHome creating a historic shortage of homes for sale in many locales. This exodus from urban and suburban markets has severely impacted tax collections for many cities that rely on wage-related taxes, calling into question the credit quality of their bonds. Further, the #WorkFromHome movement will also have serious implications for commercial real estate as companies re- evaluate their real estate needs.
  • Despite market volatility, most investors still need a healthy allocation to stocks in their portfolios. The Federal Reserve has committed to keeping rates low through 2023. That means bond returns, and the income they produce, will be significantly lower than in years past. While bonds are important stabilizers in your portfolio, they may not be enough to generate the income you need for a comfortable retirement. Subsequently, we often recommend a mix of stocks and bonds, and occasionally other assets—like high yield bonds, real estate, and preferred stocks—for investors to meet their income needs.
  • Elections and markets. The next President and Congress will undoubtedly put their own unique stamp on the country’s economic, business, and tax policies. But over the past 9 decades—a span that includes 14 different presidential administrations—markets have shown to be highly resilient and reliable venues for wealth creation. History suggests investors should remain fully diversified and focused on their long-term financial goals. To learn more about market returns under various presidential administration, click here.

What should investors do now?

Remember, this is why you’re diversified. Diversifying across and within asset classes is the best defense against short-term market volatility. The cash and bond components of your portfolio are act as ballast against equity market volatility; and equities provide the growth engine your portfolio needs to build wealth and outperform inflation over time. And don’t ignore the importance of global diversification, especially given the U.S. dollar’s recent decline. While U.S. stocks have outperformed their non-U.S. counterparts over the past decade, there are a number of reasons to suggest non-U.S. stocks are positioned to do well given their low prices, higher dividends, and a weakening U.S. dollar.

Stick with your plan. You and your advisor have worked hard to determine the right asset allocation needed to achieve your long-term goals; stick with it. After all, you’re not investing for the next two months. You’re investing for the next twenty years.

We’re here to help. We understand you may have questions and concerns about the election and its potential impact on markets, your portfolio, and your goals. It’s important that you feel confident in your financial plan. That’s why we encourage you to call at any time to discuss your financial plan and portfolio with your advisor. We’re always here to help.

To view the full Q3 Markets Summary, please click here to download a PDF.

The information provided in this presentation is intended to educate and is for information purposes only.
Mercer Advisors Inc. is the parent company of Mercer Global Advisors Inc. and is not involved with investment services. Mercer Global Advisors Inc. (“Mercer Advisors”) is registered as an Investment Adviser with the SEC. The firm only transacts business in states where it is properly registered, or is excluded or exempted from registration requirements.
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