Perspective on Q3 2020: Taxes, Pumpkin Spice, and Recession in the Rearview?

“Back to School” represents a return to order: the proverbial putting of the ducks back in a row, after summer break each year. In 2020 fashion, the ducks are more like squirrels, yet some welcome (new) normalcy is beginning to break through. Kids are back in school, football games are being played, businesses are slowly adapting, and pumpkin spice abounds. Of course, plenty of challenges remain… The pandemic is still a significant concern to health and safety—not to mention economies—around the globe. The pending U.S. elections are creating uncertainty across all levels of government. And, the striking division across our nation and communities is restricting productive collaboration and problem solving, even among innocuous topics such as the culinary application of the aforementioned pumpkin spice.

As 2020 mercifully proceeds to its final quarter, financial markets reflect a consistent truth; reasons exist for both optimism and concern in the near-term, so while their cause may be novel, their mutual existence is decidedly not. Notable highlights include the following:

• Bonds have been a stabilizing element of a diversified portfolio as expected.
  • U.S. Bonds (Bloomberg Barclays Aggregate Index): +6.79% YTD, +0.62% Q3
  • U.S. Stocks (S&P 500®): +4.09% YTD; +8.47% Q3
  • Emerging Market Stocks (MSCI Emerging Index): -2.93% YTD, +8.73% Q3
  • International Stocks (MSCI ex US Index): -8.92% YTD, +4.20% Q3
  • U.S. Small Cap (Russell 2000): -9.64% YTD, +4.6% Q3
• The recession may already be in the rear view. The economy contracted in the first and second quarters of 2020. Second quarter in particular delivered the worst decrease in Gross Domestic Product (GDP) on record, worse than the Great Recession and the Great Depression. After two quarters of decreases, the definition of a recession, the Atlanta Federal Reserve recently estimated a third quarter GDP increase of 32%. By definition, an increase marks the end of a downturn.
• The pending election has high stakes, including potential tax increases, but beware of saying this time is different. Tax speculation and high stakes occur every election. Current tax tables are historically low and have been for some time regardless of which political party was represented in the Oval Office. From 1980 to today, the average highest personal tax rate has been 39.75%; prior to 1980, the average was 75%. Corporate tax rates are also at their lowest since the start of World War II in 1939. Yet, regardless of taxation levels over the past century, companies have delivered profits to shareholders. In fact, the S&P 500® Index performed better than its average when the highest personal income tax rate was greater than 50%. The reality is that our nation’s crushing debt, exacerbated by the pandemic, will require an increase in taxes to be serviced, regardless of who is in office. Fortunately, an increased tax rate does not necessarily mean that investment returns will be negatively affected. (To take a deeper dive on this topic, check out our article posted in September – it’s worth the 5-minute read.)
• Capital markets lead a recovery, followed by the economy, and then employment. The question of how the stock market can rise amid such poor economic and employment data continues to be contemplated. We repeatedly emphasize that the stock market is a leading indicator of the economy, and the unemployment rate is a lagging indicator. Unemployment increased to Great Depression levels in Q2/Q3, with even worse rates among those lacking higher education. As consumers consume, businesses grow, and then they hire. Returning to a state of full employment is imperative to a full economic recovery and will continue as a key theme in 2021. Unfortunately, it won’t occur quickly.
• The temptation to time markets must be resisted. Stay disciplined. Data repeatedly illustrates that trying to “time the market”—guessing when the market hits a high or low, and then trading accordingly—is a futile effort. You might guess right once or twice, but it’s statistically impossible to repeatedly guess correctly. Would you put your life savings on the blackjack table? Or take the house odds? A recent JP Morgan study concluded that the average investor portfolio returned only 2.5% from 1999-2019! This is largely a result of nervous investors trying to time their trades based on perceived highs and lows. The penalty for guessing incorrectly is too high!

When the world feels like its spinning a little out of control, anchor yourself in the reality of actions and decisions that you can control. Financially speaking, maintaining your commitment to your family’s comprehensive plan is the best opportunity to achieve your goals and maintain peace of mind. So, remain focused regardless of the news headlines, or reach out to us if any of your personal headlines have changed! Supporting you through your journey is one of our great joys!

Sources: Atlanta Fed GDPnow https://www.frbatlanta.org/cqer/research/gdpnow?panel=2, irs.gov, finance.yahoo.com, MSCI.com, morninstar.com, Zack’s Investment Management September 21 2020 ‘Volatility is Back, and So Is the Temptation to Time the Market.


Disclosure:
This material represents an assessment of the market and economic environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. Forward-looking statements are subject to certain risks and uncertainties. Actual results, performance, or achievements may differ materially from those expressed or implied. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice meeting the particular investment needs of any investor. Past performance does not guarantee future results.

Index Disclosures:
Indices are unmanaged and investors cannot invest directly in an index. Unless otherwise noted, performance of indices do not account for any fees, commissions or other expenses that would be incurred. Returns do not include reinvested dividends
Index Definitions:
Barclays U.S. Aggregate Bond Index: The Bloomberg Barclays U.S. Aggregate Bond Index is an unmanaged index of fixed rate debt securities rated investment grade or higher by Moody’s, Standard & Poor’s, or Fitch rating services. All issues in the index have at least one year to maturity and an outstanding par value of at least $25 million to $1 billion based on the type of security. Indices are not available for direct investment and do not reflect any fees that may be charged.

S&P 500®: The S&P 500® index is an unmanaged index of 500 companies used as a representative sample of the United States economy. The S&P 500® index consists of only stock holdings. Indices are not available for direct investment and do not reflect any fees that may be charged.

MSCI Ex-US: The MSCI Ex-US index is an unmanaged index used as a representative sample of the global developed economy outside of the United States. The MSCI Ex-US index consists of only stock holdings. Indices are not available for direct investment and do not reflect any fees that may be charge.

MSCI Emerging Markets: The MSCI Emerging Market index is an unmanaged index used as a representative sample of the global emerging market economy outside of the United States. The MSCI Emerging Market index consists of only stock holdings. Indices are not available for direct investment and do not reflect any fees that may be charge.

DJIA: is an unmanaged index of 30 companies used as a representative sample of the United States economy. The S&P 500 index consists of only stock holdings. Indices are not available for direct investment and do not reflect any fees that may be charged.