Market Update: Third Quarter 2020

The S&P 500 hit its all-time high in the third quarter, just before a bout of volatility. Being that there is still no clear path out of the pandemic, that can be a bit shocking. While the financial and political media will likely tell you the market is trading on the most recent presidential election poll. The data suggests differently. Over the last decade, and longer, markets have binged on the sugar-buzz of government stimulus. It’s reassuring to invest when trillions of dollars are being pledged to prop up the economy. How long can it last? That is nearly impossible to predict. The Fed still has “dry powder” in its aresnal that it could pump into the economy if needed.

The bifurcation of investment markets has accelerated in 2020. The past few years have seen stock values generally rise. However, peeking under the hood shows those increases are concentrated in small pockets of the investable universe, primarily tech-based companies.

As you can see in the data below, the year-to-date returns of the S&P 500 ETF (US large-cap stocks) are positive. Expanding our lense beyond those 505 stocks, we see that US Small-cap, International, Emerging Markets, and Real Estate stocks are all negative.

Taking a deeper look to the breakdown of size, and growth versus value (commonly referred to style-box), the divide grows wider. Within just the US stock market over the last three months (left chart) large-growth companies increased 11% more than small-value companies. Looking at the last year, there is nearly a 60% difference in large-growth stocks compared to small-value stocks (right chart).

The financial media is quick to highlight the extreme performers. This feeds what behavioral finance calls Hindsight Bias. It is very easy to construct the perfect investment strategy of the 2010s. Is that the best strategy for the next decade? Be careful allowing too much of this noise to occupy your attention. Your car (hopefully) has a much larger windshield than rear-view-mirror. As financial professionals, we focus on positioning our clients for future success, not chasing last-years great ideas.

In the long-run, broad diversification tends to be the best strategy. A mix of different types of stocks, bonds, and other assets will never be the best 1-year return highlight on CNBC. That is a good thing. Time-tested, logical investing strategies for long-term investors. That is our focus.

If you need to revisit your investment strategy, you can contact us below.

Advisory Services offered through Capital Asset Advisory Services, LLC, a Registered Investment Advisor.

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. Investing involves risk, including the loss of principal.

'The Standard & Poor's 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general. It is a market value weighted index with each stock's weight in the index proportionate to its market value.

'Neither Asset Allocation nor Diversification guarantee a profit or protect against a loss in a declining market. They are methods used to help manage investment risk.

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