The Cornerstone Investment Commentary: 3rd Quarter 2020
Fueled by worldwide economic ‘re-openings’ and the second half of U.S. CARES Act benefits, global financial markets continued their recoveries in the third quarter. Some moved back into positive territory for the year.
Cornerstone clients continue to fare better than markets overall based on our steps last March (the greatest re-balancing opportunity since 2009) and due to our over-weighting to growth stocks in U.S. and foreign equities. Their impressive results show how COVID-19 has so far ‘rewarded’ communications, consumer discretionary and technology stocks. (‘Losers’ have been energy, financial and real estate stocks.) Also, your fixed income allocation of 100% U.S. Government securities keeps the ‘secure’ part of your portfolio as safe as possible.
The rest-of-the-story of this performance is that when U.S. and foreign value stocks finally begin to participate in the recovery – likely not until after a vaccine is available – the other major part of your portfolio is poised to benefit as well. Until now, it’s as if your portfolio has recovered with one arm tied behind its back.
We believe all of this positions you well. In light of 2020’s unprecedented events, however, it’s understandable to ask, “But what about …?”. Here are some thoughts on a number of important potential ripple effects:
- The election: Historically, economic events have impacted elections far more often than elections have impacted economic events. This year still seems unlikely to be an exception.
- The National Debt: Even with record Federal ‘stimulus’, our economy will shrink in 2020. But because the U.S. Government is a currency issuer (unlike households or your state), it does not need anyone, anywhere, to lend to it. Ever. The issue is never repayment. It’s always inflation. So what about …
- Inflation: Inflation will be a problem only when consumer demand exceeds what the economy can or will produce. With so many people out-of-work (or working with pay cuts) and so many businesses not fully re-opened, we are a long way from inflationary conditions. Much further away than in 2019.
- Such low interest rates: This is why you now hold ~10% more equities than a year ago when rates were higher. And it’s also why your fixed income is 100% U.S. Government securities, in case of …
- A bad COVID winter: This would indeed be scary in a non-financial way. However, if the stock market took another hit, we know that we’re much closer to a vaccine than last March, that your U.S. Government holdings should again hold their value (unlike other bonds last March) and that you have more than enough of them to ‘bridge’ the time until we can see light at the end of the pandemic tunnel.
That being said, what happens now? Clearly, great uncertainties about the pandemic’s path and timing remain. Almost certainly, too, does further market volatility. Fortunately, we need not take the risk of being wrong via attempts to predict such events. But having successfully ridden the market’s recovery to this point, it still makes sense to periodically re-balance your portfolio. When we do, we plan to hold a slightly larger portion of foreign equities in emerging market stocks that often benefit when the dollar fluctuates due to Federal Reserve actions.
With our wishes for safety and meaningful holidays, thank you for the continuing opportunity to work with you.