What in the World Happened – Third Quarter (video transcript)
Hello, I'm Josh Wolberg with Channel Your Wealth at Channel Financial, and this is the third quarter market review of 2020, or what we like to call “What In The World Happened”. For clients, your quarterly performance reports are available on the portal.
In this video we're going to talk about:
- An update on investment markets, the economy, and Covid’s effect on both of those things
- The election results, so far, and what the implications are for the investment markets
- What’s next? As far as, what we’re going to do next.
Quarterly market in the third quarter, you'll notice that stocks were all positive across the board around the world. Some did better than others, but anywhere from 2 to almost 10%. You’ll notice the bond market was also up a little bit, a little bit more than a half of 1%, both in the US and outside the US. You'll notice that on stocks these are above average quarterly returns when we think about it in the context of the last 20 years, and bonds are a little bit less than the average return in a quarter over the last 20 years. When we zoom out a little further and we think about one year, five year, 10 year, especially on the one year, so from October 1 of 2019 until September 30 of 2020 you'll notice that there's an outlier here - Global Real Estate Investment Trust. Now, what are those? Global Real Estate Investment Trust - office buildings, like this, are owned by a REIT; mini malls, parking lots, all sorts of different types of retail and commercial space, apartment buildings, sometimes hospitals. As a result of Covid, a lot more people are working from home and a lot more people doing online retail rather than in person retail, there's been a reduction in prices of commercial real estate and that showed up in Real Estate Investment Trust performance.
We think there are going to be some changes long term as a result of Covid. How business gets done, a lot more people are going to shop online than they have in the past, but it's not necessarily going to ruin Real Estate Investment Trust as an investment going forward. It's just going to accelerate some of the changes from physical space to other types of real estate. When we look at long term returns for different asset classes this is from 2005 all the way until year-to-date 2020. You'll notice Real Estate Investment Trust actually has the second highest average return, even with the negative they've put up this year. Partly because if you look at a 50-year period, Real Estate Investment Trusts have about the same average returns as stocks do, and we expect that going forward. Good diversification – wise, well thought out diversification, is we should have something that does poorly every year. It should just be a different something, and we can't predict which one will do better or worse each year, but we need to react to it appropriately. So, when something goes down and something else goes up, we need to sell the thing that's high and buy the thing that's low.
When we look at economic conditions right now, we have leading indicators, and we have coincidence indicators. Basically, leading indicators tend to predict when there's going to be recessions or economic growth, and coincidence indicators are kind of like current conditions. You'll notice there was a big dip in leading and coincidence indicators during the financial crisis, and then it's went up and down since then. In 2020 there was a sharp decline and then a sharp incline after we kind of bottomed out mid this year. When we look at month to month leading indicators (down here in the lower right corner) you'll notice we had two really negative months, March and April, as we were starting to digest what could Covid mean, and there was a big global slowdown in lockdown. As a result, and since then, we've had basically five months of very positive leading economic indicators, including even September, which was the worst of those five months, and it was still more positive than any point in the last couple years. So, we are bouncing back. We're not quite to where we were; GDP was down 30% in Q2. It was up 30% in Q3 and but we're getting a lot closer and things are starting to open up. Part of that is because as we digest Covid-19 and we figure out that it's still serious, but it's not near as bad as originally feared.
Covid’s Effect on the Market and Economy
Now let's talk about the end game with Covid-19. How do we actually get to an end game and get back to normal? In reality, it comes down to we need enough people with antibodies in order to slow down the replication of the disease. I've heard different epidemiologists talk about this from different perspectives, but they all say, basically, we all need enough antibodies. It doesn't mean that once you have the antibodies you can never get infected with Covid-19 again. However, it's likely to be a lot less severe in the future. You can get all sorts of viruses more than one time; you can get the flu and influenza and more than one time. However, normally, after you have the antibodies it replicates a lot less from person to person. The transmission is really the thing that's key, in the fact that now very few people have any antibodies.
There's two ways to get everybody, or most people, to have antibodies. The first way is what we all want - a safe and effective vaccine that can be manufactured in billions of doses and safely administered across the world as quickly as possible. That gets antibodies in people's bodies without having to have the disease. That's what we all want. The second way, which is how every other flu pandemic in the history of our species has ended, which is enough of us have gotten antibodies naturally through getting the disease that eventually the replication ratio from one person to the next slows down. It doesn't get eliminated ever, but it slows down to a point where it's basically inconsequential. That's what's happened in things like Spanish flu. It was done in about 18 months because enough people got it, even though there were measures put in place to slow the spread of it, people eventually got it and got through it. So, I'm very confident we're going to get through Covid-19. It's really about the speed. There's been some good news on vaccines lately, and that's reflected in some of the stock market prices that have done well, as a result.
I think there's going to be a lot of pent up demand. If and when, we have a vaccine, if it starts getting out there, there's going to be a huge pent up demand that's going to be unleashed, especially on the hospitality industry. I heard a chief economist, just the other day, talking about if we have a vaccine it's going to be hard to get a seat in a restaurant, or table in a restaurant, a seat in an airplane, a hotel room, for maybe a few years because there's going to be such an unleashing of demand.
When we think about fatalities for Covid-19 we have to put it in context. What's great about this graph is it puts it in per million people. So, we can start to tell anecdotes and put it in context. Here in the Twin Cities we have about 3 million people in the metro area. In the US the number of fatalities per million people is about three people per million per day. So, in the Twin Cities, that would mean about nine people per day, give or take, if we're above or below average for different states. Nine people is too many, two people is too many, but to put that in context. First, versus Europe it's half the rate of Europe right now. When we look at other causes of end of life across the different age groups Covid is actually a really small percentage compared to all those other causes. It doesn't mean that Covid is not a big deal, but from a long-term economic perspective, it's not going to have as big of an impact as originally feared and that's what's key on this slide. Somewhere between six and 10 times more people are going to pass away from other things then from Covid, depending on the age group.
Now let's talk about the election a little bit. We learned some lessons from the election, and one of them is that we had record turnout, and it was a lot closer than a lot of people assumed, especially the pollsters in the mainstream media. What it looks like is we're going to have a divided government. It looks like Biden is going to win the presidency, at least the AP has called it for that, there's some court challenges, but either way, if we have if we have Biden, or if somehow Trump pulls off a miracle and becomes president, chances are it looks like the house is going to remain in Democratic hands, although their majority looks like it got smaller. It looks like the Senate is going to remain in Republicans’ hands and that might have gotten a little smaller, too. So, we might almost have 50/50 in the House and 50/50 in the Senate, or darn close on both, and then a President that just barely won either way, but probably Biden at this point.
The market is starting to price this in from the standpoint of, the market generally likes divided government. Let's talk about that. Average returns with divided government has been about 10% over a long period of time, and only about 8.2% with a unified government where everything's Republican or everything's Democrat control. The biggest reason why we think that is, is it's really difficult to get sweeping legislative reforms through when you have divided government, and especially now where things are really contentious and divided. Sweeping legislation isn't always bad, but it does cause businesses to reallocate time from trying to increase revenue and trying to decrease expenses to now we need to digest Sarbanes Oxley, or we need to digest the tax reforms of 2017, or we need to digest the Affordable Care Act, and all the changes we're going to have to make because of those. Again, I'm not saying any of those individual pieces of legislation are bad, but it does refocus businesses away from revenue and expenses to trying to digest that legislative change. We think divided government is generally going to be decent for economic growth, simply because we're not going to have big legislative changes.
Now, when we think about the presidential election not necessarily being done, and being contentious maybe for a little while, and being contested, we have a real world example of that in the past in 2000 with George W. Bush versus Al Gore, and that didn't wrap up for about five weeks after the election night. You'll notice here markets were down during that time and volatile, specifically, during the contested period. Part of the reason it was down during this time is this was the bursting of the tech bubble; that happened in 2000, 2001 and 2002. The reason this was negative might not necessarily have anything to do with a contested presidential election, but more to do with other factors in the economy, which affected the long-term economy a lot more than then W. Bush versus Gore.
Alright, so this all means that Covid and getting out of Covid, getting beyond Covid, is most likely to have the biggest effect on markets going forward and on the economy.
So, what's next? We're going to continue to monitor the economy, markets, and Covid just like we always do. We're going to look at those graphs like we showed earlier in the slides. I look at those every single day and keep apprized to the numbers. We're going to continue to rebalance portfolios, and manage cash and accounts, as needed; you may see some trades in your accounts. I've done some rebalancing, lately. It has nothing to do with a prediction based on after the election. It happened after the election because stock markets did really well, bond markets did really quite poorly in the days after the election, so essentially what we did is it allowed us an opportunity. We didn't have enough bonds in a lot of client accounts, and we had too many stocks. So, essentially, we sold stocks at a gain and bought bonds on sale. We'll do that again if in the market if stocks go down and bonds go up. We’ll sell bonds and buy stocks. Hopefully, this was helpful. If you found it helpful, feel free to share it with others. Thank you for watching - this is Josh Wolberg, stay curious my friends.
Past performance is not a guarantee of future results. Investment advice offered through Resources Investment Advisors, LLC, an SEC-registered investment advisor.