3Q’20: What a Difference a Year Makes

In my view, we are in a secular bull market, given the Fed’s commitment to multi-year support and an economic recovery underway, albeit slower than expected given the continuing pandemic.

The stock market had just made all-time highs in late February when the economy shut down to fight COVID-19, erasing three years of stock market gains as the market collapsed 35% within a month.

Immediate, all-encompassing action from the Federal Reserve, coordinated with $3 trillion in fiscal stimulus– direct aid to both individuals and small business – provided key support for the economy as unemployment skyrocketed to 14.7%, with over 23 million Americans suddenly out of work, levels not seen since the Great Depression of the ‘30’s.

That aid helped keep individuals and businesses afloat, personal income growing, savings rates high and gave direct support for a recovery in retail sales. Manufacturing, housing and auto sales have recovered strongly, yet significant sectors of the economy still lag as consumers stay away: leisure, restaurants, entertainment, and travel.

The strong, summer start to an economic recovery sent the stock market flying to new highs September 2nd. But as the pace of recovery began to slow — weekly new unemployment claims remain above 800,000 and the decline in unemployment has slowed to just under 8% (vs. 3.5% in February) — the market declined four weeks in a row, led by the same mega-cap tech names that made August a banner month in the stock market.

The failure to contain the pandemic has affected consumer behavior and inhibited spending, turning a meaningful number of temporary job losses into permanent ones, delaying a full economic recovery. Indeed, some critical industries face long-term structural damage as demand remains significantly below historical averages (think airlines with heavy fixed and operating costs).

The still-delayed, much-needed second round of fiscal stimulus is critical to support a flagging consumer and failing businesses: consumer spending is 70% of US GDP. Fed Chair Powell and nearly every economist, portfolio strategist and analyst on Wall Street are urging immediate action, as 800 small businesses fail daily. With small businesses employing some 59 million people in the US, or 47.5% of total employment, the risks of long-lasting economic damage are rising the longer fiscal stimulus is delayed. Seasonal health risks are increasing, too, as winter approaches and infectious disease experts warn of a resurgent virus.

Stock market volatility typically increases in the months leading up to a Presidential election, and this one is no exception with the current COVID outbreak in the White House and sinking polls throwing the GOP into disarray, and the uncertainty as to timing of and acceptance of the election outcome another source of angst.

However, the Fed’s unwavering commitment to broad-based economic support for the foreseeable future, better therapeutics for treating COVID-19, and the high probability of a vaccine available early next year, provide an important underpinning to the stock market.

As for election implications, the stock market is starting to play the odds and price in the election of Joe Biden as polls widen. Consensus expectations that a Biden presidency means a corporate tax hike, infrastructure spend, and wealth taxes are likely only if Republicans lose control of the Senate, which looks 50/50 as of this writing.

Lower corporate earnings due to higher taxes would likely be offset by aggressive fiscal stimulus and a federally directed, comprehensive effort to end the pandemic and open all areas of the economy: controlling the pandemic is key to getting the economy and jobs back on track. Consensus believes a Biden presidency would not be as positive for the economy, yet two firms with no political axes to grind just argued the opposite: leading investment firm Goldman Sachs said a Democratic sweep would mean a faster recovery, and top, credit-rating agency Moody’s says Biden’s plan would add 7.4 million more jobs than Trump’s.

Those of you reading who are investors with us know how well the year has gone in your portfolios, despite the extreme market volatility. Going forward, we plan to stay fully invested, though the recovery will take longer than many expect. We see little change near-term in the fundamental drivers of our portfolio holdings and expect a strong economy in 2021.

At BD8 Capital Partners, we continue to look for and invest in companies with long runways of growth, sustainable competitive advantages, strong balance sheets and seasoned management teams. We have used the severe shocks of the last year to buy premier names at prices well below where they are now.

If you would like to discuss your financial planning needs, the health of your portfolios and whether you are well positioned for what lies ahead, please feel free to contact us here at BD8 Capital Partners.

Please stay safe and healthy.

Warmest regards,
Barb
Barbara Doran
CEO CIO
bdoran@bd8cap.com
linkedin.com/in/barbara-doran-7aa248
https://twitter.com/barbara_doran1__

BD8 Capital Partners LLC
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Office: 646-885-5682
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Nolen Howe (Assistant)
nhowe@bd8cap.comOffice: 332-220-3922

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