Market Movement Archives | Page 17 of 20

2020 in the rear-view mirror

What a year 2020 was! For investors, 2020 offered good opportunities and returns — if you stayed for the ride. It was the first year since 1938 that the S&P 500 returned more than 15% while volatility was greater than 30%. The COVID-19 pandemic led to rapid losses in February and March, followed by an unprecedented recovery as both monetary and fiscal policy came to the rescue. The initial rebound in the market was led by technology stocks, more specifically, the stay-at-home stocks. At the end of the year, cyclical and small-cap stocks drove the market higher.

The Fed acted quickly and aggressively to address liquidity needs in the fixed income and bond markets, lowering the Federal Funds rates from 1.75% to zero in response to the global pandemic. The bond markets remained resilient with the help of the CARES act and the additional funds provided for state and local governments. Because of the quick action, bond default rates remained low and did not exacerbate the economic problems.

Compared to the stock market, the oil market more accurately reflected the economic reality. Crude oil fell more than 20% on the year as the pandemic caused a decline in global energy demand. Later in the year, production cuts from OPEC helped stabilize the price of oil. Gold, often considered a safe-haven asset, rose more than 20% on the year, as investors sought safety following the market decline and concerns of inflation arising with the level of increased national debt.

The economy experienced a real rollercoaster, with the biggest quarterly contraction on record in Q2, followed by the largest quarterly gain in Q3. After the shutdown in April and May, consumer saving reached the highest levels ever. Consumer spending shifted during the year as spending habits favored online shopping over brick-and-mortar stores. With the resurgence of COVID cases this winter, consumer spending has moderated going into 2021.

For 2021, growth expectations are high. We continue to highlight the following reasons why we feel the market may keep driving higher in 2021:

1. The health of the global economy and the rollout of vaccinations worldwide.

2. Technological acceleration in the world, brought about by the COVID-19 outbreak.

3. The Federal Reserve working on the premise of targeted inflation of 2% with the outlook of low interest rates for several years.

4. The government acting quicker than in past pandemics, leading to faster market recoveries.

5. The amount of cash on the sidelines waiting to be deployed on sizable market retractions.

6. The consumer savings level, which is significantly elevated compared to pre-pandemic levels.

So, what can we learn from all this? A new year almost always brings new surprises. From an investment perspective, we use the above insights to help with the strategic and tactical asset allocation and where we see the portfolio heading over the next five to seven years, with short-term adjustments along the way. We are not trying to time the market, but we will try to take advantage when we see where the market is heading. Having a well-balanced, diversified portfolio and a financial plan are keys to successful investing. The best option is to stick with a broadly diversified portfolio that can help you to achieve your own specific financial goals – regardless of market volatility. Long-term fundamentals are what matter.

Sources: FS Investments, FactSet

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Using diversification as part of your investment strategy neither assures nor guarantees better performance and cannot protect against loss of principal due to changing market conditions.

Past performance is not a guarantee of future results.

The MSCI Europe Index is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of the developed markets in Europe. The MSCI EAFE Index (Europe, Australasia, Far East) is a free float-adjusted market capitalization index that is designed to measure the equity market performance of developed markets, excluding the US & Canada. The MSCI World Index is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of developed markets. The MSCI Emerging Markets Index is a free float-adjusted market capitalization index that is designed to measure equity market performance of emerging markets. The MSCI AC (All Country) Asia ex Japan Index is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of Asia, excluding Japan. The Dow Jones Industrial Average is a popular indicator of the stock market based on the average closing prices of 30 active U.S. stocks representative of the overall economy. S&P 500 Index is an unmanaged group of securities considered to be representative of the stock market in general. NASDAQ Composite Index measures all NASDAQ domestic and international based common type stocks listed on The NASDAQ Stock Market. The Russell 2000 Index measures the performance of the small-cap segment of the U.S. equity universe. It is not possible to invest directly in an index.

The opinions expressed in this commentary are those of the author and may not necessarily reflect those held by Kestra Investment Services, LLC or Kestra Advisory Services, LLC. This is for general information only and is not intended to provide specific investment advice or recommendations for any individual. It is suggested that you consult your financial professional, attorney, or tax advisor with regard to your individual situation.

Securities offered through Kestra Investment Services, LLC (Kestra IS), member FINRA/SIPC. Investment Advisory Services offered through Kestra Advisory Services, LLC (Kestra AS) an affiliate of Kestra IS. Kestra IS and Kestra AS are not affiliated with CD Wealth Management.

Click Here for Additional Investor Disclosures

What will the new year bring?

We are excited for 2021, and we think the same positive momentum that helped us finish the year strong will continue in the weeks and months ahead. Among our reasons for optimism:

1. The improved health of the global economy and the successful worldwide rollout of the COVID-19 vaccine.

2. Rapid technological adoption and the ascension of the digital economy, caused by the pandemic.

3. The Federal Reserve’s commitment to an inflation target of 2% and the outlook of low interest rates for several years.

4. The amount of cash on the sidelines that is waiting to be deployed on sizable market retractions.

5. Consumer savings that are significantly elevated, compared to pre-pandemic levels.

6. The swift market recovery, thanks to the government’s quick actions, compared with previous financial crises (see chart below).

The markets — and the global economy — are not without risks, however. History tells us that the biggest risks in a typical year aren’t usually from out of left field, 2020 notwithstanding. Or as Mark Twain famously said, “It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so.”

If we look to identify the unexpected, we see the following as risks to the global markets in 2021:

1. Problems with the vaccine rollout potentially delaying the economic recovery.

2. Trade tensions with China and other countries as a new administration takes over in the White House.

3. A faster tightening of fiscal or monetary policy than is anticipated.

4. Shock to the interest rate caused by inflation or a surge in bond yields.

5. Overbuying in the stock market and valuations being stretched.

Some have begun to compare 2020 to the tech bubble of 1999-2000, but we believe the two environments are not similar for a number of reasons. The current environment has a more favorable outlook for risk assets, as the 10-year Treasury rate today is less than 1%; in January 2000 it was more than 6.5%. Inflation is low today, and that favors longer-duration assets, such as technology and other innovative companies. Also, the increase in sales of the technology companies is keeping pace with share price increases, while in 2000, share price increases soared well ahead of actual increases in sales.

Most importantly, equity valuations are modestly higher than that of the S&P 500 today, whereas in 2000, technology multiples were more than 2 times the multiple of the S&P 500. The harmonic averages shown in the chart below remove significant outliers — giving a better sense of the value of a company — and the disparity between weighted average and harmonic average points to numerous stocks in 2000 with extreme valuations, compared to today.

The rally in technology stocks today is being driven by stronger earnings and better profitability. Innovation continues to drive the technological revolution, accelerated by the pandemic. There will continue to be winners and losers from this race, as in all races, but we think that pace of technological change will only continue to increase in the future.

So, what can we learn from all this? Whether or not these particular risks occur, a new year almost always brings surprises. From an investment perspective, we use these trends to help with the strategic and tactical asset allocation and to define where we see the portfolio heading over the next five to seven years, with short-term adjustments along the way. We are not trying to time the market, but we will try to take advantage when we see where the market is heading. Having a well-balanced, diversified portfolio and a financial plan are the keys to successful investing. The best option is to stick with a broadly diversified portfolio that can help you achieve your own specific financial goals, regardless of market volatility. Long-term fundamentals are what matter.

^{Sources: Bloomberg and Capstone Research, Factset}

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S&P 500 Index is an unmanaged group of securities considered to be representative of the stock market in general. The Dow Jones Industrial Average is a popular indicator of the stock market based on the average closing prices of 30 active U.S. stocks representative of the overall economy. NASDAQ Composite Index measures all NASDAQ domestic and international based common type stocks listed on The NASDAQ Stock Market. The Russell 2000 Index (RTY) measures the performance of the small-cap segment of the U.S. equity universe. The MSCI EAFE Index (MXEA) is an equity index which captures large and mid cap representation across 21 Developed Markets countries around the world, excluding the US and Canada. The S&P 500® Value Index (SVX), represents the value companies, as determined by the index sponsor, of the S&P 500 Index. The Index measures the performance of large-capitalization value companies in the United States. The MSCI Emerging Markets Index (MXEF) captures large and mid cap representation across 26 Emerging Markets countries. The NASDAQ-100 Index (NDX) is made up of 103 equity securities issued by 100 of the largest non-financial companies listed on the Nasdaq stock market. It is a modified capitalization-weighted index. The S&P 500® Growth Index (SGX), represents the growth companies, as determined by the index sponsor, of the S&P 500 Index. The Index measures the performance of large-capitalization growth companies in the United States. It is not possible to invest directly in an index.

Using diversification as part of your investment strategy neither assures nor guarantees better performance and cannot protect against loss of principal due to changing market conditions.

Click Here for Additional Investor Disclosures

How can the market and the economy look so different?

Ever since stocks began to rebound from the March bottom, there has been a glaring disconnect between the impact of the coronavirus on the economy and the good mood of the stock market. Eight months later, that disconnect is as wide as ever. If one only looked at the markets, it would be difficult to tell that anything was amiss.

Investors remain in a bullish mood while the economy continues to deal with the surging spread of the coronavirus, new lockdowns in California, increased unemployment claims and a lack of stimulus from Congress for those who remain out of work. While economic numbers tell the story of the past, the stock market’s focus is on the future. The markets are not ignoring the news of the day, they simply are looking beyond it —focusing on a low interest rate environment for the next several years, a vaccine rollout that will allow the economy to reopen in 2021, a new political administration and an additional stimulus package.

It is generally understood that day-to-day market swings do not reflect what is going on in the true economy, although it may feel like they should. There are some fundamental differences between the two which can be exacerbated in short time periods, but over the long run, the stock market and the economy do tend to have a stronger correlation.

At the most basic level, the economy is the production and consumption of goods and services. It encompasses all individuals and companies, as well as the government. The stock market, however, is an exchange where the buying and selling of shares of publicly traded companies occur. Stocks trade based on future earnings; they are forward-looking in nature. The earnings expectations for the top large-cap companies are high, and we should expect these companies to face volatility in the near future with growing regulatory pressure, ad-spending boycotts, the upcoming runoff election and potential corporate tax changes.

Small businesses are known to be the lifeblood of the U.S. economy, but they do not represent the stock market. According to the U.S. Small Business Administration, small businesses make up about half of private sector employment and 44% of U.S. economic activity. They represent over 99% of U.S. employer firms and create two-thirds of new jobs.

Less than one third of Americans work for publicly traded companies. That means the U.S. stock market represents only a portion of U.S. employment and does not entirely reflect how economic gains are distributed throughout the economy. The composition of the stock market also is different from the real economy. We see this in the weighting of major indexes, like the S&P 500, in that the largest stocks have the biggest influence. Right now, the largest five companies, all of them growth technology companies, make up 25% of the S&P 500.

So, what can we learn from all this?

Basing investment decisions on the current economy instead of where it is headed can often lead to incorrect assumptions about the direction of the stock market. Trying to time the market is extremely difficult and can cause poor investment performance. As we near the end of 2020, we view more risk being out of the market than in the market. Riding out future market volatility, in addition to having a diversified portfolio, means staying the course.

It all starts with a solid financial plan for the long run that understands the level of risk that is acceptable for each client. With regards to investments, we believe in diversification and having different asset classes that allow you to stay invested. The best option is to stick with a broadly diversified portfolio that can help you to achieve your own specific financial goals – regardless of market volatility. Long-term fundamentals are what matter.

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Using diversification as part of your investment strategy neither assures nor guarantees better performance and cannot protect against loss of principal due to changing market conditions.

Click Here for Additional Investor Disclosures

2020 portfolio recap and trends for 2021

As we near the end of 2020, we look back on the stock market’s wild ride. The year began with positive equity returns, followed by a global pandemic that sent the market into a drop not seen since the Great Recession and then a strong recovery, led by technology stocks from the “stay at home economy.” Throughout the year, we made the following changes to our risk managed portfolios:

1. In early February, we significantly reduced energy exposure, and in late March, we increased large-cap exposure, through additional exposure to technology and healthcare. We funded the changes by selling out of small- and mid-cap stocks, as well as real estate. We anticipated that small- and mid-cap stocks would take longer to recover from the economic shock caused by COVID, while technology and healthcare would benefit from the stay-at-home economy. At the same time, for fixed income, we sold emerging market debt and added to our U.S. bond portfolio through additional exposure to high-quality corporate bonds.

2. We have continued throughout the year to be active and nimble in this market, and in May, we reduced our exposure to higher-dividend stocks. We used the proceeds from the sale to increase our exposure to healthcare in the portfolio.

3. In July, we removed the remaining higher dividend-yielding exposure. We moved the monies into equities that instead focus on dividend appreciation. The index tracks the performance of stocks of companies with a record of growing their dividends year over year.

4. In November, upon the announcement of a vaccine being available, we decided to add back small- and mid-cap growth stocks that would benefit from the reopening of the economy, and we swapped out of our position in global infrastructure.

Our focus remains on long-term investing with strategic allocation while maintaining a tactical approach. Our decisions to make changes are calculated and well thought-out, looking at where we see the economy moving. To use a hockey analogy from Hall of Famer Wayne Gretzky, we skate to where the puck is going, not to where it already has been. We are not guessing or timing the market. We are anticipating and moving to those areas of strength.

We strategically have new cash on the sidelines and buy in for those clients on down days or dips in the market, similar to what people do in their 401(k)s every other week. We speak with our clients regularly about staying the course and not listening to the economic noise, as we feel the markets will come back over time.

Looking into 2021 and beyond, we see the following trends:

* In the short term, the outlook for the global economy hinges on health outcomes, specifically when the vaccine will roll out and how long it will take before economies return to their pre-pandemic levels. Social activities have been curtailed, and job losses in service sectors have been scarring, but the permanent job losses are likely to be limited.

* Work automation and digital technologies have been accelerated by COVID-19. People are relocating from the cities to the suburbs as more people work from home, and this is likely to continue in the post-pandemic world.

* The crisis responses by the government and Federal Reserve have been faster and more direct, and they are unlikely to be reversed quickly. For example, interest rates are projected to remain close to zero for years to come, whereas in the past, the Fed would be quicker to raise short-term rates as the economy ramps up.

So, what can we learn from all this? From an investment perspective, we use these trends to help with the strategic and tactical asset allocation and where we see the portfolio heading over the next five to seven years, with short-term adjustments along the way. We are not trying to time the market, but we will try to take advantage when we see where the puck is going. As we near the end of 2020, we view more risk in being out of the market than in being in the market. Our plan is to ride out future market volatility, have a diversified portfolio and stay the course.

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Using diversification as part of your investment strategy neither assures nor guarantees better performance and cannot protect against loss of principal due to changing market conditions.

Click Here for Additional Investor Disclosures

Going up: Online shopping, consumer saving and the markets

Preliminary sales numbers have been posted for Thanksgiving and Black Friday, and they paint an interesting picture. Black Friday hit a new record with consumers spending an estimated $9 billion, an increase of 21.6% over last year’s $7.4 billion. On Thanksgiving Day, retail sales totaled $5.1 billion, an increase of 21.5% over last year.

Meanwhile, foot traffic at stores fell by 52.1% compared with last year, a reflection of consumers’ move toward online shopping as the pandemic continues to spread. And consumers have more money to spend as well; consumer saving remains elevated compared to pre-pandemic levels. The stock market is reflecting optimism in companies that heavily favor the online retail environment, even in a post-pandemic reality.

The stock market continued to move higher in November, setting records along the way. The chart below reflects November equity market returns for stock indexes through Nov. 27. The Dow Jones Index breached 30,000 for the first time, and the NASDAQ surged past 12,000. Investors are in a bullish mood while the economy continues to deal with the second wave of the coronavirus, possible lockdowns, increased unemployment claims and a lack of stimulus from Congress for those who remain out of work. While economic numbers and sometimes grim headlines tell the story of the past, the stock market’s focus on is on the future. The markets aren’t ignoring the news of the day, they simply are looking beyond it.

*Past performance is no guarantee of future results.*

Optimism in stocks continues to move the market higher, shrugging off negative economic data. The reason for the optimism is severalfold:

• Expected vaccine rollouts from Pfizer and Moderna later this year and in early 2021
• Political winds calming with the change in administration
• Potential split party between the White House and the Senate
• Continued talk of stimulus package before the end of the year
• Federal Reserve’s pledge to keep rates near zero for years to come

This does not mean that stocks are without risks. It will be some time before industries such as hospitality, service and energy return to their pre-COVID levels of employment and positive outlook. Stock prices are high based on optimism for the future, which is reflecting breakthroughs in vaccine development. However, the backdrop remains positive for asset prices, and we will continue to buy the market dips.

So, what can we learn from all this?

Trying to time the market is extremely difficult. As we near the end of 2020, we view more risk being out of the market than in the market. Riding out future market volatility in addition to having a diversified portfolio means staying the course.

Data Sources: Horizon, St. Louis Federal Reserve, CNBC

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Click Here for Additional Investor Disclosures

4 of the trends we are watching

In this week’s update, we want to share with you our thoughts on the broader market and what we see on the horizon as we approach 2021.

1. Vaccine: Three drug companies have signaled that their vaccines show greater than 90% efficacy, which is extremely strong; a typical flu vaccine is roughly 40% to 50% effective in a given year. Around the world, 12 vaccines are in phase III trials, and as vaccines begin to roll out soon, delivery and distribution will become the focal point. The markets have responded in anticipation of a “return to normal” in 2021 as speculators sell the work-from-home stocks, looking for value in beat-up sectors such as energy and financials.

We think that this is premature, as interest rates are likely to remain low for several years and energy companies must work through their excess supply while demand remains well below normal levels. Also, the virus is spreading rapidly throughout the country, and several cities and states are imposing a modified version of a lockdown to prevent their hospitals from becoming overrun.

2. Staying the course: Just as they did four years ago, the pollsters on TV misread the election. The lesson: Not only is politics unpredictable, but our certainties about investing might be wrong as well. We tend to overestimate the prevalence of negative information, which can lead to bad decisions. As we write in our weekly updates, it’s important to stay the course, follow the financial plan and to avoid trying to time the market based on what we think are certain outcomes. A recent Wall Street Journal article sums it well: “The trick is to embrace uncertainty without fooling yourself into thinking that impetuous decisions can give you control over it.”¹

3. Technology (and talk of a bubble): Led by the so-called FAANG stocks – Facebook, Amazon, Apple, Netflix and Google — the technology sector has performed very well in 2020 compared to the overall market. Several factors have helped technology stocks outperform this year:

* Ease of buying and selling through new trading apps that allow fractional share ownership.

* Cheap money through low interest rates.

* Speculation of stay-at-home companies like Zoom — and how they will permanently change how business will be performed.

If you equally weight all the stocks in the S&P 500 instead of looking at it from a market-weighted perspective, the overall market is roughly 10% above its long-term average. Or, as the Wall Street Journal put it: “A Stock Market Bubble? It’s More Like a Fire.”

4. The evolution of industry: Over the last four decades, waves of innovation have transformed the power of technology, creating a new batch of winners across sectors and industries. As technology evolves, the sector lines continue to blur. For example, companies are now classified as FinTech, a combination of a financial and technology company. Healthcare companies’ use of artificial intelligence enables more efficient drug discovery. As we look ahead, we think that the disruptive power of technology will continue to spur shifts within industries and pave the way for new market leadership.

*Source: Bloomberg. Market Matrix U.S. Sell 5 Year & Buy 30 Year Bond Yield Spread (USYC5Y30 Index). Daily data as of 10/12/2020.*

So, what can we continue to learn from all this?

Accurately predicting the next market move and timing the market is extremely difficult and can adversely affect the long-term performance of your portfolio. Riding out future market volatility in addition to having a diversified portfolio means staying the course and not trying to time the market. It all starts with a solid financial plan for the long run that understands the level of risk that is acceptable for each client. With regards to investments, we believe in diversification and having different asset classes that allow you to stay invested. The best option is to stick with a broadly diversified portfolio that can help you to achieve your own specific financial goals – regardless of market volatility. The economy, and therefore, the market, is bigger than the direction the political winds are blowing. Ultimately, it’s the long-term fundamentals that matter.

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All investments involve risk, including loss of principal. Past performance does not guarantee future results. There is no assurance that the investment process will consistently lead to successful investing. Asset allocation and diversification do not eliminate the risk of experiencing investment losses. Mutual funds are subject to market, exchange rate, political, credit, interest rate and prepayment risks, which vary depending on the type of mutual fund. Information provided is provided solely for informational purposes and therefore are not an offer to buy or sell a security, and are not warranted to be correct, complete or accurate by Kestra IS or Kestra AS.

This material contains an assessment of the market and economic environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. Forward-looking statements are subject to certain risks and uncertainties. Actual results, performance, or achievements may differ materially from those expressed or implied. Information is based on data gathered from what we believe are reliable sources.

S&P 500 Index is an unmanaged group of securities considered to be representative of the stock market in general. You cannot directly invest in the index.The opinions expressed in this commentary are those of the author and may not necessarily reflect those held by Kestra Investment Services, LLC or Kestra Advisory Services, LLC. This is for general information only and is not intended to provide specific investment advice or recommendations for any individual. It is suggested that you consult your financial professional, attorney, or tax advisor with regard to your individual situation.

Securities offered through Kestra Investment Services, LLC (Kestra IS), member FINRA/SIPC. Investment Advisory Services offered through Kestra Advisory Services, LLC (Kestra AS) an affiliate of Kestra IS. Kestra IS and Kestra AS are not affiliated with CD Wealth Management.

Click here for additional investor disclosures.

Do bonds still work?

Many of our clients have been concerned lately about where they can find income in today’s environment of low interest rates. They ask us questions like:

• If rates remain low for several years, what changes will we need to make with our fixed-income holdings?

• Will fixed-income holdings continue to help my portfolio be diversified — and will bonds add return?

The bond market has been relatively quiet with Treasury yields trading near historic lows. Some worry that if markets become volatile and stocks face a large decline again, bond yields don’t have much room to fall, and therefore, they won’t provide as much protection as they have in the past. In March, both stocks and bonds fell simultaneously for several days before the Federal Reserve stepped in to calm the markets. We view this as an anomaly and not a financial crisis, since the entire economy was shut down due to the pandemic.

To be clear: We firmly believe that fixed income plays a critical role in portfolio diversification.

The right mix of assets depends on an individual’s capacity and tolerance for risk and reward. The traditional portfolio of 60% stocks and 40% bonds was designed as a starting point, understanding that stocks and bonds move differently over time, and the correlation between the two asset classes is not constant. The chart below shows the correlation over time between stocks and Treasury bonds, illustrating that bonds can provide diversification from stocks during market downturns.

Source: Charles Schwab Investment Advisory, Inc. Historical data from Morningstar Direct, as of 3/31/2020. Indexes representing the investment types are: **U.S. stocks** = S&P 500 Total Return Index (1990 onward); **U.S. Treasuries** = Bloomberg Barclays 3-7 Year Treasury Index (1992 onward) and FTSE U.S. Treasury Benchmark 5-year USD (1990-1991). **Past performance is no indication of future results.**

Looking beyond diversification, with yields currently low and expected to remain low for several years, the high returns seen so far this year in the bond market are not likely to be repeated over the next few years. Our expectation is that if the economy continues to improve, inflation will gradually move higher. Another round of stimulus could provide an additional boost to growth. This could lead to falling bond prices as intermediate and longer-term bond yields would rise, or steepen, as seen below.

We continue to recommend that investors maintain a broad diversification among stocks and bonds, and we expect returns for both stocks and bonds to be lower for the next 10 years compared to the last 10 years, as we are starting at a higher valuation point. Investors will need to maintain a broad exposure to global asset classes to help manage risk and provide a broader set of investment opportunities. Depending on each individual risk tolerance, the level of fixed income and equity exposure may vary. We believe that if you are a conservative investor, fixed income will continue to be a critical component of the portfolio and will offer opportunities for return.

So, what can we learn from all this?

We don’t believe that the diversification benefits from owning fixed income have changed. We believe that bonds still play an important role for diversification from stocks and provide income to boost portfolio returns. We will continue to look for opportunities in the fixed-income sector to provide diversification, income and total return. Riding out future market volatility in addition to having a diversified portfolio means staying the course and not trying to time the market.

It all starts with a solid financial plan for the long run that understands the level of risk that is acceptable for each client. With regards to investments, we believe in diversification and in having different asset classes that allow you to stay invested. The best option is to stick with a broadly diversified portfolio that can help you achieve your own specific financial goals – regardless of market volatility. The economy, and therefore, the market, is bigger than the direction the political winds are blowing. Ultimately, it’s the long-term fundamentals that matter.

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Using diversification as part of your investment strategy neither assures nor guarantees better performance and cannot protect against loss of principal due to changing market conditions.

S&P 500 Index is an unmanaged group of securities considered to be representative of the stock market in general. You cannot directly invest in the index.The opinions expressed in this commentary are those of the author and may not necessarily reflect those held by Kestra Investment Services, LLC or Kestra Advisory Services, LLC. This is for general information only and is not intended to provide specific investment advice or recommendations for any individual. It is suggested that you consult your financial professional, attorney, or tax advisor with regard to your individual situation.

Securities offered through Kestra Investment Services, LLC (Kestra IS), member FINRA/SIPC. Investment Advisory Services offered through Kestra Advisory Services, LLC (Kestra AS) an affiliate of Kestra IS. Kestra IS and Kestra AS are not affiliated with CD Wealth Management.

Click here for additional investor disclosures.

The election is over. Now what?

Although some recounts and legal action remain before the results of the election become official, news networks have projected that Joe Biden will be the nation’s 46th president — and markets have rallied over the past week, buoyed by additional clarity and less policy uncertainty.

The S&P 500 rose 7.3% for the week last week. The strength continued this week with news from Pfizer on its vaccine efficacy and the hope that the world can return to “normal” in 2021. The predicted “blue wave” that some investors feared would unify the government and lead to significant policy shifts has evaporated — although legislative control remains up for grabs with a pair of Senate runoffs in Georgia coming in January. The chart below shows that since 1945, the S&P 500 has averaged a 14% annualized return with a divided Congress and a 12% return with a unified government.

We received many calls leading up to the election from investors who were concerned about the possibility of higher volatility and a major market selloff after the election. As is often the case, however, the opposite occurred: We have seen volatility drop to levels last seen in August, and even before that, pre-pandemic levels. The chart below illustrates that volatility and market returns often move counter to each other. When volatility goes down, the stock market sees higher returns, and when volatility increases, stock market returns decrease.

As we have discussed before, trying to time the market and make large bets seldom works out favorably. Market timing is rarely a winning strategy; staying invested is the key to long-term success. Historically, the best financial approach in election years is to stay invested, and we saw this play out again last week. Sticking with a long-term financial plan that is based on individual objectives while avoiding market timing around politics is usually the best course of action.

So, what can we learn from all this?

Accurately predicting the next market move and timing the market is extremely difficult and can adversely affect the long-term performance of your portfolio. Riding out future market volatility in addition to having a diversified portfolio is sound strategy. It all starts with a solid financial plan for the long run that is based on your acceptable level of risk. The best option is to stick with a broadly diversified portfolio that can help you to achieve your own goals, regardless of market volatility. The economy, and therefore, the market, is bigger than the direction the political winds are blowing. Ultimately, it’s the long-term fundamentals that matter.

Data sources: GSAM, Index Indicators, Capital Group

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Profits, Profits, Profits

On the heels of a record decrease in gross domestic product (GDP) for the second quarter, the U.S. economy rebounded swiftly with a record increase in the third quarter. GDP — the amount spent by U.S. consumers during a given period — climbed 33.1% from July through September after taking a 31.4% tumble from April through June.

While pent-up demand for consumer goods and better manufacturing activity drove that growth, the U.S. economy remains about 4% lower than last year’s levels, and service sectors such as hospitality, restaurants and airlines remain under pressure.

As the economy rebounded in the third quarter, so too did profits. So far, almost 72% of the companies in the S&P 500 have reported earnings for the third quarter. Of those, 87% exceeded earnings estimates, and 77% beat revenue estimates, well above long-term averages.

It is possible that analysts set the bar too low for the third quarter, though, as sectors such as energy and financials are seeing positive earnings surprises despite being lower than a year ago. The chart below shows that each sector in the S&P 500 had better than expected earnings for the third quarter.

Although the economy is recovering from the shutdown in March and April, the road to recovery continues to be challenging. Consumer staples, technology and health care are expected to see positive earnings growth on a year-over-year basis. Other sectors, like financials and energy, are expected to decline year over year. However, as the chart above illustrates, banks and energy companies have reported stronger revenues and earnings than anticipated.

Bank profits have been better than expected with strong trading revenues from asset management as well as lower-than-expected loan-loss provisions. As the chart below shows, current losses stand at 8.3% of sales for banks, compared to 19.7% of sales in aftermath of the Global Financial Crisis. Even with rates at or near zero, the financial companies are able to limit their loan losses and therefore, deliver positive earnings to the bottom line.

With 2020 earnings generally better than expected and earnings season more than two-thirds complete, where do we go from here? Although the current environment feels more uncertain than normal with the election as well as the COVID-19 pandemic, the best approach to investing in the markets remains one of balance and maintaining asset allocation that meets your individual risk tolerance. As we have written several times over the last few months, the markets do not care about election results; they favor certainty and profits. Historically, markets have performed very similarly regardless of which party controls the White House.

What does this mean for you?

Having a mix of growth and value stocks, large stocks and small stocks, U.S. stocks and international stocks and bonds while staying the course has always made the most sense for investors.

Remember that market downturns offer the chance to buy stocks at lower prices, which could position a portfolio well for future growth. If we experience volatility due to election turmoil, we will follow your financial plan and ignore the noise. There are no guarantees that stocks will perform to anyone’s expectations, and decisions could result in losses including a possible loss in principal. However, it may be helpful to remember that some investors use downturns as opportunities to buy stocks that were previously overvalued relative to their perceived earnings potential.

Data Sources: FactSet, JP Morgan Asset Management, Invesco

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Presidents and portfolios

We are now a few days from the election, and we are receiving calls and emails from clients who are wondering if they should make changes to their portfolios before the results come in. History suggests election results should not be the primary driver of investment decisions; this is especially true this year, with the pandemic and the fiscal and monetary response from the Federal Reserve driving the markets. While the election certainly will have an impact on the country, we caution against taking drastic action in the world of investing.

Market commentators — and presidents themselves — have cited the stock market’s performance as a measuring stick of White House policies, but the data doesn’t support this, as seen in the chart below.

Instead, the key drivers of stock market performance are the fundamentals of earnings, interest rates, job growth and productivity. Policy changes do have ramifications for financial plans, tax strategy and estate planning, but not when it comes to day-in, day-out asset allocation.

We want you to keep these thoughts in mind as we enter the home stretch of the election:

1. Markets have performed well under both parties. As the light blue bars show in the chart below, the markets have yielded positive returns, no matter which party controls the White House or Congress, over a four-year presidential cycle.

2. Investors are better off staying fully invested. The best-performing portfolio over the past 120 years was one that stayed fully invested through both Democratic and Republican administrations.

3. Monetary policy matters more than who occupies the White House. Historically, presidents have been hurt or helped by monetary policy conditions. Both President Reagan and President Clinton benefited from consistently falling interest rates. Both President George H.W. Bush and President George W. Bush were hurt by Fed tightening, an inverted yield curve and a recession. President Obama benefited from a benign rate environment during his term (minus a brief moment in 2015–2016), and President Trump experienced tighter policy during his first two years, but the last two years have seen rates return to zero. The adage “Don’t fight the Fed” rings true.

4. Don’t confuse politics with market analysis. Some of the best returns in the market came when the presidential approval rating was in the low range of between 36% and 50%.

What does this mean for you?

Investors have prospered in markets during difficult political times. The average return of the S&P 500 since the end of World War II is almost 11%. Staying the course has always made the most sense for investors. Follow your financial plan and ignore the noise.

Remember that market downturns offer the chance to buy stocks at lower prices, which could position a portfolio well for future growth. Again, there are no guarantees that stocks will perform to anyone’s expectations, and decisions could result in losses including a possible loss in principal. However, it may be helpful to remember that some investors use downturns as opportunities to buy stocks that were previously overvalued relative to their perceived earnings potential.

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