My F&M

3rd Quarter Market Commentary: Doubt

Share This Article

Few have matched the wit of Dorothy Parker.  Her poem “Inventory” includes the lines:

Four be the things I'd been better without:
Love, curiosity, freckles, and doubt.

We may quibble about her other desired castoffs, but no one wants more doubt.  Unfortunately, this is a time of exceptionally elevated uncertainty and doubt.  In fact, extraordinary market uncertainty has prevailed for more than six months now.  Our rapidly approaching election only adds to that.  So does last night’s development that the President tested positive for the virus.

In spite of this confusion, stocks were strong in July and accelerated their ascent in August.  But stocks eased a bit in September, breaking the string of positive months since April.  The blended stock index declined 3.3% in September as the S&P 500 returned -3.8% and international stocks outperformed US stocks for the first time in a while with a -2.5% return. 

The S&P 500 Index experienced just short of a 10% correction within the month of September, and the US market’s five largest, popular stocks fell on average more than 17% from closing high to closing low within the month.  We have written about expensive stocks greatly outperforming cheap stocks this year.  That trend slightly reversed in September, with the main index of cheap (“value”) stocks returning -2.6%, and the index of expensive (so called “growth”) stocks returning -4.6% last month.  But that still leaves expensive stocks way ahead for the year.

Our comment one month ago (“Passing Strange”) closed noting:
"September has typically been the worst month for markets.  Except that in election years, the worst month has historically been October.  As markets ride a wave of liquidity into a headwind of election concerns, we have no idea how the interaction of the two will play out, but increased volatility seems a reasonable outcome for which to steel.  We’ll all be pleased when both pandemic and election are behind us and we’re grateful markets have so far bounced back as well as they have."

Other than the fact that September is now behind us, everything else pertains.

Underlying all this uncertainty is the health crisis.  When we wrote a month ago, the 7-day average of new cases of Covid-19 had declined for the previous six weeks from over 67K new cases per day to 41K per day at the end of August.  That trend continued until 9/12, bottoming at 34K new cases per day.  Then it turned up, reaching an average of just over 45K new cases per day on 9/23 (thought to be largely a function of many universities reopening).  Fortunately, that has stopped climbing over the last week and has been flat since then.   We hope this presages a new declining trend in cases – we’ll see.  Average daily deaths have declined nearly 40% from their secondary peak in early August, but deaths lag cases so we can’t say they are likely to continue to fall in the near-term.

Perhaps the most important current aspect of the health front is vaccine development.  Much has been speculated (and debated) about the timing of vaccine availability, so we won’t add to that here beyond noting there are now four US vaccines in the final stage of trials along with several others around the world.  How long it may take after availability to get people vaccinated is another equally important source of uncertainty.  But in that regard, we note that getting the full population vaccinated is not necessary for unconstrained economic activity.  Since the mortality rate for Covid-19 is thought to not exceed that of seasonal flu for the majority of the population, what is needed is to get health care workers and the vulnerable portion of the population vaccinated, and after that, most restrictions could likely be lifted.  That is obviously still some months away, but it can be accomplished much faster than the time necessary to get the entire willing population vaccinated.

Most economic data has surprised on the upside in recent months, and the consumer is strong in aggregate with retail spending, housing, and autos each in relatively good shape.  However, an overheated stock market – especially large technology stocks – combined with extreme uncertainty concerning the election and developments on the health front all loom as potential near-term headwinds for investments.  In the longer-term, low interest rates and high stock valuations will inevitably reduce returns.  But in the meantime, after we clear immediate hurdles, an extraordinarily accommodative Federal Reserve and ongoing economic recovery, should it not derail, will likely be enough to overcome the doubts.

"Our doubts are traitors,
And make us lose the good we oft might win,
By fearing to attempt."
-Shakespeare, Measure for Measure