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In the Market & Economic Outlook, we separate the relevant from the noise, to bring you timely content that helps you on the path to and through retirement!
STATE OF THE MARKETS (S&P 500 +4.55% YTD through 9/10/20)
The S&P 500 Index touched a new all-time high in early September, rallying more than 55% in less than five months. It may be hard to believe while we’re still in the midst of a global pandemic and an election year, but this move to new highs officially kicks off a new bull market.
Historically, when a new bull market begins, the S&P 500 Index rises on average 46% over the next 12 months. We don’t expect stocks to rise that much, given the current economic climate and election-related headwinds.
September is typically the weakest performing month of the year. And as the election nears, investors may act irrationally regarding their investment holdings. While these are real concerns, we are comforted by the fact that investors are maintaining over $5 trillion in cash that could provide fuel for stocks. Plus, the Fed has committed to continue to expand its balance sheet to “grease the wheels” of the economy.
Economic Update
As the U.S. economy continues to reopen, the Atlanta Fed is projecting GDP will grow +29.6% in the third quarter, with further strength expected in the 4th quarter.
On the jobs front, the unemployment rate dropped to 8.4% in August, down from 15% at the beginning of the pandemic. While we still have 11.5 million fewer jobs than in February, a recovery is on the way.
Sales of existing homes rose 24.7% between June and July. Those are incredible figures when you consider we are still in a recession and millions of people are out of work. And while housing starts were up an astounding 23% in July, the lack of inventory has been the biggest challenge. Many homes are selling within hours and in many cases, are selling well above list price.
An interesting trend to watch as it relates to home sales and the permanent impact of Covid is the trend of people leaving high density cities for the suburbs. Now that many Americans will likely continue working from home permanently, there is less incentive to fight traffic, pay high rents and city taxes, and live in densely populated areas.
In addition, retail sales numbers are on the rebound, and we are likely to see a strong recovery in spending when the pent-up demand is unleashed once this crisis is behind us. We expect the release of pent-up demand will boost further economic growth into 2021 and beyond.
Each of these trends could keep stocks buoyant over the near-term and provide opportunities for banks, industrials, and other cyclical stocks as conditions gradually return to normal.
Investment Themes
In addition to opportunities that exist broadly in the current economic and market climate, there are several areas we are emphasizing in client portfolios:
DIVIDEND STOCKS
Despite the Fed’s best efforts, we continue to have very little inflation and it now appears we will have to live with low interest rates for years to come. With savings accounts, CDs, and bonds paying so little interest, we expect investors will look to high-quality dividend paying stocks for income. While dividend stocks have been largely ignored by investors in favor of big tech stocks, we believe that a return to dividend stocks is likely given their attractive valuations and income.
SMALL-CAP STOCKS
One of the areas that has underperformed large-cap stocks is the Russell 2000 small cap index. However, starting in early August, it rallied 7% in just two weeks.
Earnings estimates for small caps has been improving faster than their large-cap brethren. Why? These small companies are adapting quickly to Covid-19 and changing demands of consumers. Now earnings estimates for smaller companies have risen 35% since the start of the second quarter, which could provide an additional boost for small-cap companies to move higher.
Bottom Line
Now that stocks have hit new all-time highs we are officially in a new bull market. But investors need to be prepared for more volatility as the election approaches. Jobs are coming back and economic conditions are improving. That should bode well for further economic growth for the rest of 2020 and into 2021.
We are so excited to announce that Michelle Tran has joined the True North team as our associate paraplanner! Michelle loves helping clients feel confident about their finances and is excited to grow with our company. She loves to travel, try new foods and enjoys wine tasting. Welcome Michelle!
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Disclosure:
The views outlined in this newsletter are those of True North Retirement Advisors (TNRA) and should not be construed as individualized or personalized investment advice. Any economic and/or performance information cited is historical and not indicative of future results. Economic forecasts set forth may not develop as predicted.
Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product made reference to directly or indirectly, will be profitable, equal any corresponding indicated historical performance level(s), or be suitable for a given client or portfolio.
Investing in stocks includes numerous specific risks including the fluctuation of dividend, loss of entire principal and potential illiquidity of the investment in a declining market. Bonds are subject to market and interest rate risk if sold prior to maturity. Bond and bond mutual fund values and yields will decline as interest rates rise and bonds are subject to availability and change in price.
Any questions regarding the applicability of any specific issue discussed above should be addressed with TNRA. All information, including that used to compile charts and/or tables, is obtained from sources believed to be reliable, but TNRA has not verified its accuracy and does not guarantee its reliability.
Moreover, you should not assume that any discussion or information contained in the newsletter serves as the receipt of, or as a substitute for, personalized investment advice from TNRA or from any other investment professional. To the extent that you have any questions regarding the applicability of any specific issue discussed above to your individual situation, you are encouraged to consult with TNRA or the professional advisor of your choosing. All information, including that used to compile charts, is obtained from sources believed to be reliable, but TNRA has not verified its accuracy and does not guarantee its reliability.
