The summer brought an economic rebound and a continuation of the stock market rally that began in the spring, as all three of the major Wall Street stock indexes advanced. Hopes for further fiscal stimulus, the promise of 11 vaccines reaching phase 3 clinical trials, and a resumption of day-to-day activities improved investor outlook. Corporate earnings also improved sharply. In the 2nd quarter, companies beat analyst estimates by 17%, representing the biggest beat since 2000. The summer brought an economic rebound and a continuation of the stock market rally that began in the spring, as all three of the major Wall Street stock indexes advanced. Hopes for further fiscal stimulus, the promise of 11 vaccines reaching phase 3 clinical trials, and a resumption of day-to-day activities improved investor outlook. Corporate earnings also improved sharply. In the 2nd quarter, companies beat analyst estimates by 17%, representing the biggest beat since 2000.
Stocks rallied strongly through July and August, entering historic territory by mid-summer. The Nasdaq Composite climbed 9.5% in August, and the Dow Jones Industrial Average gained 7.5%, finishing with its best August since 1984. Advancing 7% to cap a 5-month winning streak, the S&P 500 had its best August since 1986. September got off to a good start, with a new record close for the S&P. Then, reservations about the rally surfaced. Traders began to question the sustainability of the summer economic recovery, and whether a fall uptick in coronavirus infections might hurt business and consumer spending. For the quarter, the S&P 500 added nearly 8%, ending the quarter up about 5.6% for the year. However, the Dow Jones Industrial Average is still down 0.9% year to date while the small-cap Russell 2000 Index has underperformed significantly and is down nearly 9% for the year through the end of September.
Looking at foreign stock exchanges, MSCI's EAFE index, which tracks large companies across developed countries in Europe and Asia, rose 4.9% in Q3, yet is still down 7% year to date.
For bonds, the 10-year Treasury spent all of Q3 yielding between 0.52% and 0.74%, reaching the top of that range in late August. For those refinancing 30 year mortgages at rates around 3%, credit the very low interest rate on the 10-year Treasury which is the basis of many mortgages. For the year, the aggregate bond index is up around 6%.
The U.S. Economy
Many positive signals appeared this quarter. Millions of Americans went to work again; monthly net job growth topped 1.7 million in July and 1.3 million in August. Unemployment, which had hit 14.7% in April, fell to 8.4% in August. Consumer confidence, as measured by the Conference Board's monthly index, leaped to 101.8 in August from 86.3 in July. Households kept up their buying—retail sales were up year-over-year through August even though supplemental unemployment benefits expired at the end of July.
Industries also grew, according to research from the Institute for Supply Management. When ISM's Monthly Purchasing Manager Index for the manufacturing and services sector surpasses 50, those sectors are judged by ISM to be expanding. ISM's services PMI was at 58.1 in July and 56.9 in August; its manufacturing index reached 56.0 in August. This came on the heels of a 6.4% rise in U.S. factory orders in July.
Home sales soared as summer began, and although that momentum tailed off, sales did not retreat. Residential resales were up 24.7% in July, and another 2.4% in August. New home buying increased 4.8% for August after a 14.7% July climb. Housing starts and building permits were both up 17.9% in the first month of the quarter, before declining slightly in August. A notable exception to the housing boom is New York City, which is suffering from a mass departure of residents leaving record-high vacancies and homes for sale.
For more than a century, the Federal Reserve has had two primary monetary policy objectives: to manage inflation and to guide the economy toward a state of maximum employment. Historically, managing inflation has come first. So it made news on August 27 when Fed Chairman Jerome Powell announced that the central bank would "seek to achieve inflation that averages 2 percent over time," rather than proactively adjust short-term interest rates when inflation approaches that established target. In other words, it would tolerate a little more inflation than it had in the past as a trade-off for spurring the economy. The Fed kept the federal funds rate in the 0%-0.25% range in the quarter, and its September consensus interest rate forecast showed it expected no change for short-term interest rates through 2022.
The Global Economy
As economies worldwide continued to labor under the coronavirus pandemic, the International Monetary Fund (IMF) and Organization for Economic Cooperation and Development (OECD) revised their estimates of global economic activity for 2020 and 2021. The IMF sees a 3.0% contraction for global Gross Domestic Product (GDP) this year, with the global economy growing 5.8% next year. Similarly, the OECD estimates a 4.5% pullback for global GDP in 2020, and then a 5.0% rebound in 2021.
Wall Street enters the fourth quarter with a bit of uncertainty. While the five largest companies in the S&P 500 are up 33% year to date (all technology companies), the remaining 495 companies are down 2.5%, indicating that the recovery is not broad based. The first reading on 3rd-quarter Gross Domestic Product growth is on October 27, roughly one week before election day. The Federal Reserve Bank of Atlanta's GDPNow tracker estimateds real Gross Domestic Product (GDP) growth of 32.0% for the third quarter.
Federal Reserve officials expect low-interest rates and very little inflation through 2022. Sustained low-interest rates could drive more borrowing and business investment, and improve the outlook for the housing market.
The November election results may produce any number of reactions. However, market trajectory is likely to be more focused on the success of the potential COVID-19 vaccines; and there are only educated guesses as to when these may appear, and how effective they may be. The elephant in the room, of course, will be how the world handles a potential second wave of positive coronavirus cases in Q4. With the United States currently at 40,000 new cases per day and Europe starting to see a sharp uptick, there are concerns that subsequent lockdowns could postpone the global recovery.
Year End Tax Maneuvers
With three months to go until 2021, we want to ensure you are doing everything within your financial plan to mitigate taxes. Here are a few quick reminders to consider as you close out the year.
Max out your 401(k) or 403(b) at $19,500 ($26,000 if you are over the age of 50). If you are not sure what that requires, ask for a recent paystub and work backwards to contribute the correct amount each pay period to max out the plan.
Open an individual 401(k) if you are self-employed. Deferrals are due by 12/31, while profit sharing contributions can be made prior to your tax filing deadline.
Max out your Health Savings Account (HSA) if you have a high deductible health insurance plan. Spend down your Flexible Spending Account (FSA).
Offset investment gains with losses. We will be doing this for you within the taxable accounts we manage, but do make us aware if there are other gains or losses to consider outside of our view.
Perform Roth conversions by 12/31 if you are in a low income tax bracket due to job loss or early retirement.
While Required Minimum Distributions (RMDs) are waived thanks to the CARES Act, consider qualified charitable distributions if you are over age 70 1/2. Donor advised funds may also still be used to bunch up charitable contributions for a tax deduction in 2020.
Lastly, depending upon the election results, we may be reaching out to some clients to consider accelerating gifting to family members before the end of the year if a rollback of the federal estate exemption appears imminent in 2021 (retroactive to Jan. 1 2021).
We continue to invest in technology to improve investment outcomes and to assist clients in tracking their progress toward achieving their personal and financial goals and objectives.
Many clients use our Wealth Management System as part of their overall financial plan. Clients can aggregate held away assets to gain a comprehensive view of their financial picture and we can build out goals-based or cash-flow based income projections as well.
As part of a revamp our reporting capabilities, we will be launching a new client portal this quarter in which detailed account information as well as future quarterly reports will be available all on the same site. We’re hoping to have single sign on capabilities so you can view our new client portal and the wealth management system by signing into just one application.
The best part of the new system is that we’ve been able to capture client account history (transactions, performance, allocation changes over time, portfolio value charts, etc.) going back to 12/31/2005. That means our longest tenured clients will have 15 years of historical account data available in the new website. Clients who haven’t been with us for that long will still have historical account information back to their account inception. Look for more information about our new client portals this quarter, and a new-look quarterly performance report through year end in January.
With just a little under 3 months left in this most challenging of years, we want to thank you for allowing us to assist you in meeting your personal and financial goals and objectives. If you have any questions or concerns, especially time sensitive issues that need to be addressed before year-end, please reach out to us as soon as possible so as to avoid volume-related service delays that inevitably crop up over the last two weeks of December.