Q4 2020 Stock Market Update
Key Summary: From peak to trough, we saw a 34% drop in the S&P500 during the first 6 months of 2020. While many investors believe the stock market to be in dismal shape, we've actually seen a historic rebound. In fact, we've actually seen a historic rebound where the S&P 500 is up 5.6% (as of September 30th) despite the volatility surrounding the Coronavirus.
While the U.S. has put approximately 14.9% of its GDP towards fiscal stimulus programs (including loans, equity, and guarantees), we've seen similar fiscal efforts on a global scale as well. Some developed countries such as Italy and Germany have put forth as much as 40.9% of their respective GDPs into fiscal efforts to aid in the economic recovery needed from COVID-19.
Unemployment & Wage Growth
As the pandemic continues, we've seen many industries such as travel, retail, and oil doing significant lay-offs as they try to figure things out. Earlier this year, we saw massive unemployment numbers, almost 15%, but by August, we were back down to 8.4% . For perspective, the 50-year average for unemployment is 6.3%. The changes we've seen in wage growth are interesting as a result.
The 50-year average for wage growth is 4%. We're currently hovering at 4.9% as of August 2020, but we did see a significant jump of up to almost 8% for a time earlier this year. Why? We've seen a drastic amount of workforce reduction in industries where the majority of labor is considered low-skill or blue collar workers (ie. airlines, oil, retail, hotels). Historically, wage growth typically occurs in white collar occupations where workers are in high-demand (think, technology, finance, and other sectors where employees can continue working productively from home), and that demand has continued during the COVID crisis.
Investment Strategy with the Upcoming Election
In a contentious election year, it's difficult to predict what the next four years have in store for investors. We believe the best long-term investment strategy is to stay diversified and stick to your long-term asset allocation strategy. Our wealth management and investment approach utilizes industry-leading research as our foundation. By focusing on minimizing costs, tax liability, and volatility when constructing our clients' portfolios, we manage investments with the goal of outperforming the broad stock market as a whole regardless of who's in office.
While many investors try to time the market, it requires you to make not only the right choice on when to buy, but also when to sell, which are oftentimes two decisions that investors rarely get 100% right. Historically, the best returns over the last 120 years were those who stayed invested through both Democratic and Republican administrations rather than only being invested when their preferred political party was in the White House.
Note: Typically, the fourth year of a presidential term tends to outperform the first three years, regardless of party affiliation or split; despite the novel Coronavirus pandemic, 2020 seems to be following suit with the S&P 500 reaching record highs as of September 1st, 2020.
Fixed income is 2020's high-performer so far, and, while it's important to avoid chasing what's run recently, it's also important to understand what causes shifts among asset sub-classes. One of the sub-classes we believe is attractive right now is spread fixed income. With continued concerns over defaults brought on by the pandemic, the fixed income spreads for securities have become quite attractive for long-term investors. Despite a minor fall from summer, yields on Corporates have reached 2.01%, Convertibles are at 4.58%, and High-Yields have already seen returns of over 5%, as of September 30th.
Equities vs. Fixed Income in a Low-Interest Rate Environment
Alternatively, we believe holding onto cash is no longer the attractive option it was at the beginning of 2020. In recent months, we've seen a rise in inflation given our ongoing trade war concerns with China, demand for travel decreasing due to Coronavirus, and the cost of domestic goods and services decreasing as well. While we believe cash holds an important place in a portfolio, it's important to be diversified as it can be dangerous to hold too much cash, especially in a high-inflation environment where you're not making any money on it.
If you have questions regarding the webinar or your current portfolio, let us know and we'll have one of our advisors get in touch.
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Nick Johnson, CFA®, CFP®
President & Wealth Manager
Willis Johnson & Associates is a registered investment advisor. Information presented is for educational purposes only. It should not be considered specific investment advice, does not take into consideration your specific situation, and does not intend to make an offer or solicitation for the sale or purchase of any securities or investment strategies. Investments involve risk and are not guaranteed. Be sure to consult with a qualified financial advisor and/or tax professional before implementing any strategy discussed herein. Corporate benefits may change at any point in time. Be sure to consult with human resources and review Summary Plan Description(s) before implementing any strategy discussed herein. Willis Johnson & Associates is not a CPA firm.