The Economy and Market from Here... at Hills Quarter 4 2020

The Economy and Market from Here... at Hills Quarter 4 2020

October 1, 2020

Tagged As: Wealth Management

We hope everyone is staying safe and healthy as we continue through 2020. The 3rd quarter had no shortage of market excitement as monetary and fiscal stimulus continued to fuel a pickup in growth. Macro data improved and business and consumer confidence strengthened providing pace to the economic recovery. However uncertainty over the global pandemic and upcoming elections created volatility in the markets leading to a 3.80% decline for the S&P 500 in September. Despite the rocky end to the 3rd quarter, the S&P was up 8.93% for the period, and up 5.57% for the year. International markets (as measured by the MSCI EAFE) were also up during the 3rd quarter, gaining 4.87%, but remain in negative territory year-to-date, declining 6.69%. Similarly, small company stocks (as measured by the Russell 2000) gained for the quarter, up 4.93% but are down 8.70% for the year.

The economy is far from a full recovery, and we continue to monitor COVID-19 case trends. Europe has seen a reacceleration of case growth. In the U.S., many areas are experiencing growing case levels, though aggregate daily case numbers have declined from a July peak. In terms of impact on the economy, consumer sentiment continues to modestly rise while jobless and unemployment benefit claims fall, showing that employers are re-hiring. However, even with September’s employment increase and a fifth straight monthly gain in net payrolls, the U.S. economy is still only about halfway to recuperating the jobs lost during the pandemic.

Experts agree that prompt stimulus measures were widely to thank for improving economic data around the globe. In the U.S., almost $3 trillion in spending and lending programs were approved with bipartisan support last spring in an effort to offset the economic damage caused by COVID-19. While this federal relief has alleviated many wounds, many agree that more support will be necessary to keep the recovery going. Unfortunately, debate over the next round of fiscal stimulus has been delayed. Acrimony between the two parties and shifting focus – primarily due to a Supreme Court appointment – may postpone any additional action until after the November election.

As we attempt to move towards an economic recovery, there are certainly anomalies forming in markets. Record-low mortgage rates, spurred by the Fed's moves to lower borrowing costs across the economy, have helped strike up demand for housing. New data shows that the housing market stayed strong throughout the summer. In August, U.S. new-home sales increased at the fastest rate since 2006. New found demand is driving what some experts are calling an affordability crisis, in which higher home prices strip away the benefit from lower interest rates. Inventories are evaporating quickly while others are straining to pay their mortgages. In fact, 17% of FHA-insured mortgages were delinquent in July. Cities like New York saw that rate as high as 27.2%.

Amongst all the uncertainty and unique market environments, the Federal Reserve has released more specific plans to keep interest rates low in order to achieve a new 2% or greater inflation target. In the most recent FOMC meeting, Jerome Powell explained that the new inflation target will not be in place for just one month, but on an ongoing basis. Once the FOMC is satisfied that inflation is not only likely to remain at 2% but will rise moderately higher than 2%, then they will consider interest rate hikes. Powell also explained that the economy needs to reach maximum employment in order for rising wages to cause inflation to reach the Federal Reserve’s target. It is therefore probable that interest rates will remain low for the next 3 to 5 years as labor markets and the economy normalize.

Looking ahead

We feel additional fiscal stimulus is necessary to keep the recovery on track, but Congress is unlikely to strike a deal before Election Day. It remains to be seen if a post-election Congress will be able to reach a deal on stimulus, but deterioration in the economic data may force their hand in the coming months. The Federal Reserve stands at the ready with many options available should economic activity remain subdued, which means fixed income markets should avoid a liquidity crisis and a repeat of what we saw earlier this year.

The biggest challenge in the current environment is how to deal with increased market volatility against a backdrop of very low bond yields. While no solution is straightforward, refocusing on fundamental investment principles is our preferred approach. Exposure to domestic and international companies, large and small companies and including alternate assets like real estate and infrastructure can provide both diversification and income. The key at the current juncture is to recognize that historically volatility is a normal investment experience but markets are resilient; investors should ensure that their portfolios are structured in such a way that they will be able to remain invested during this period of elevated volatility, and subsequently participate in the upside that capital markets have to offer over the longer-term.

We are here to answer your questions and make sure your current asset allocation is still appropriate for your circumstances. If it has been a while since you have visited with us, please do not hesitate to call or email and set up a meeting with your Hills Bank Trust and Wealth Management Officer.

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