As we quickly approach the end of the year, it’s interesting to reflect on all that has happened over the past ten months. 2019 feels like a lifetime ago, and so much has changed in such a relatively short period of time. The world in many ways is unrecognizable, particularly as it relates to how we travel, socialize, and work. The same is true for financial markets, which experienced one of the fastest 35% drawdowns in U.S. stock market history, followed subsequently by the fastest recovery in history as well.
More recently, U.S. equities declined by roughly 10% heading into the U.S. election, before rebounding in the first week of November, although U.S. equities (S&P 500) remain a couple percent below their early September high. All said, the S&P 500 high back in the first quarter was around 3,400 and today it’s at 3,500, so amidst all the volatility and choppiness, the Q1 to present move was only 3.5%, which is pretty benign in the scheme of things.
The same cannot be said for gold prices, which are roughly 30% higher from where they started the year, driven largely by falling real yields and extraordinary levels of monetary policy accommodation.
Both the monetary and fiscal policy programs that we discussed in our first quarter investment updates have since transpired, and this has driven much of the equity market recovery since the March lows. For reference, we have attached our Investment Update from March 13th, which was roughly one week before the March low in the stock market.
The good news is that as we head towards the end of the year, markets are back, more or less, to where they were at the beginning of the year. The bad news is that domestically and internationally, it looks like Covid-19 restrictions could be with us through the end of the year, which may serve as a drag on 4th quarter growth. To help offset that drag, Congress tried to pass a second round of stimulus measures in October, but was unable to do so, likely due to the 2020 Presidential election, which has served as a complicating factor.
From where we sit today, the rest of the year is somewhat of a binary outcome. If the U.S. election can be decided in the next couple weeks, and government can move quickly to pass the stimulus measures, stocks could finish the year on a high note. Conversely, if the election gets bogged down in lawsuits and recounts, and the stimulus gets put on hold as a result, it’s likely that the Christmas shopping season will be a dud, and U.S. equity markets will quickly move to price that in.
Given this situation, our general recommendation is to let the world evolve as it will over the next 6-8 weeks, and once the dust settles, and the future path of policy comes into view, investors can position accordingly. We would note that there are some big differences between our current environment and that of the first quarter. In March, stocks were cheap, market volatility was high, and policymakers were almost certain to act in an expeditious manner. But from where we sit today, stocks are expensive (90th percentile and above), volatility is low (relative to Q1), and policy makers are distracted by political issues, impeding their ability to pass legislation that was needed months ago. That doesn’t mean stocks couldn’t rally a bit further over the coming days or weeks, which they very well could, but when viewing asset-allocation from a multi-year perspective, we believe investors should wait for additional clarity, rather than trying to position around a binary outcome amidst elevated equity market valuations. For additional context, we have provided a chart above, courtesy of the Wall Street Journal, which shows just how remarkable this recovery has been relative to past market cycles.