Markets Climb as Virus Containment Continues

Quarterly Review, October 7, 2020

By Mitchell Anthony


The US equity markets had a terrific quarter despite the fact that little progress was achieved in containing the coronavirus.  US Equities lead all asset classes in the 3rd quarter of 2020 with the S&P 500 advancing 9%, MACM’s Dynamic Growth Portfolio Advancing 12%, and MACM’s Diversified Equity portfolio advancing 13.7%. Foreign Equities lagged badly in the quarter likely due to the fact that the European economy has very little share of the globe’s big cap tech industry.   Gold advanced 5.8% as the Fed adopted a posture of more accommodation and more patience with inflation.  Real estate failed to follow through with further gains in the third quarter after significant gains in the second quarter.  Generally most REITs were flat or up 1-2% in Q3.  High quality fixed income investments were mostly flat for the quarter as prices began the quarter at historical highs with only a few rational reasons why investors might expect yields to decline further.  Distressed debt performed a bit better as credit quality improved during the quarter given the feds intervention and Congress’s willingness to support distressed areas of the economy.

The US economy’s recovery that began in the second quarter continued in the third quarter but at a relatively slow pace as the defense of the Covid 19 virus remained a top priority for America and the globe.  While the infection rate in the US has declined it is still at a relatively high level averaging 30,000 to 40,000 infections per day.

The US population seems to be respecting the virus and adapting their lifestyle to steer clear of virus. Social distancing measures are in full force across America.  Masks are in use in public areas and required by retail businesses in most states across America.  Public gatherings likewise are highly restricted by states and counties.  There has been a 2nd wave of the virus that hit in Europe as summer vacations tested individual’s patience for social distancing. It is hard to estimate what expectations there are for individual’s willingness to take the vaccine but it is notable that Global Vaccine production is ahead of plan as testing went quite well.

US Economy Recovering in Volatile manner

US economy has been hit hard by the coronavirus but yet the resilience of the American consumer is notable and the economy has made progress but there has been volatility amongst sectors with some having headwinds and some having tailwinds.   Consumer Confidence has had a modest rebound of about 4% during the quarter but is still off 30% from pre-Covid levels. It is interesting to note that consumer confidence is not highly correlated to retail spending or personal consumption. The American consumer typically talks pessimistically all the time while spending optimistically.  Personal Income remains high at 19.5 Trillion falling back to trend. Personal income had a significant rise due to all of the helicopter money given to consumers during the second quarter. While the second dose of helicopter money was expected it has not surfaced yet and as a result personal income has fallen back a bit.  Unemployment remains high at 7.9% but has rebounded significantly from the second quarter levels during the peak of Covid fears and reactions to the virus.  We have seen a Sharp Bounce of 7% in the quarter in retail sales levels which is far above historical levels.  Personal Consumption rebounded over 9% but is still well below pre-Covid levels as the services component of personal consumption reduced the overall level of personal consumption.  Consumer services obviously remain distressed as one on one contact is still discouraged and being avoided by most consumers.   The Industrial sector is rebounding with mixed results.  Commercial aircraft production is not rebounding or is it expected to for the next year or two.  Housing has been the best part of the industrial sector with New Home sales up over 49% in the third quarter.  Further Existing home sales gained by 53% in the third quarter.  The virus pushed people out of apartment living and into single-family homes and people are now buying more home than they had previously as they spend more time doing everything from home. Industries that are tied to homebuilding are recovering and the outlook seems bright. However the outlook for durable goods is very uncertain due consumption trends that continue to be affected dramatically by the virus.

US Exports rebounded to 113 billion but are still off the 130 billion trend of the past year. While the US has clearly been a hotspot for the virus compared to the rest of the world consumption trends in the US are similar to that of other foreign countries who have less of a virus problem but are still hunkered down similar to America.

Corporate America is clearly suffering because of the virus.  The service sector is not operating or if it is it is limping along at a fraction of its capacity. The problem is notable in the fact that Corporate Profits are lagging and still off trend by over 10%.

US Economy Still Struggling To Reopen

The work from home theme prevalent in the US economy has had mixed results for the underlying businesses. Clearly the Financial Sector is struggling to work productively from home. Wall Street cannot maintain its culture or keep its employees motivated while they are at home.  The Manufacturing sector has had mixed results and obviously cannot have most of their employees at home and hence has had to embrace social distancing at work at extreme cost.  The Tech sector has found that working from home to have reasonably good success but continues to move toward bringing people back to the office so cultures can be maintained.   Obviously social distancing is still highly impacting retail services.

The first round of fiscal stimulus saved the US economy during the worst economic downturn in history. The outlook for the economy is now a bit uncertain as the Second round of planned fiscal stimulus has not been approved by Congress.  It is clear that help will come however it is uncertain how much will come and how much damage might be done while Congress wrangles over the issues.


Financial Markets Made New Highs With Stay At Home Leadership

The leadership in the equity markets attempted to shift away from stay-at-home names to cyclical names several times during the third quarter. However it became clear that the tailwinds for our tech titans were much stronger than anticipated and the headwinds for the cyclicals failed to calm.  It seems that the stay-at-home theme may be here for a long period and not just until the virus is contained.

The Economic Outlook For The US Is Uncertain But The Probabilities Are High For A Full Recovery

The US economy does not quite have enough momentum to sustain itself and will need continued stimulus to get a positive feedback loop established for most of the industrial and cyclical areas of the economy.  The tech sector and tech related consumer areas are more than 50% of the US economy and as a result this part of the economy has self-sustaining growth and will lead the rest of the cyclical sectors out of this recession.   Home construction and remodels will lead the industrial sector as the interest rate environment remains ultra-friendly.  The Fed may well begin a round of quantitative easing if for whatever reason investors abandon the bond market.

Financial Market Outlook

Stocks will continue to be the place to be in the year ahead.  Domestic Equities will lead and Foreign equities will lag.   Tech and tech enablers will lead the equity market higher.  Cyclicals will lag in the near term but will likely lead within another few quarters.  Fixed income will likely remain flat as prices are already extremely overvalued.   Gold and REITS will trend higher.

We remain optimistic.