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Shortly after we predicted that the S&P 500 would reach a new all-time high in our August newsletter, our prediction proved true on August 21st, 2020 when the S&P 500 closed at 3,397. It then rose another 2%, before capping out at 3,588 on September 2, 2020.
For those of you who’ve been clients for a while, you’ve heard us talk a lot about different “buckets of money” that are intended to meet short term, intermediate term, and long term income needs. Through the final week of August, we opportunistically took profits in stocks and refilled our retirees’ short term income buckets. We did that for two reasons: upcoming uncertainty around the election and what we felt were over extended valuations.
Those premises have been confirmed in the month of September as the S&P 500 has corrected as much as 10%. Many are concerned this might be the start of a larger correction, but we do not believe so. 10% corrections in the S&P 500 happen on average every 11 months, and on average recover in 101 days. We think it will be much quicker this time, as rapid declines and recoveries seem to be par for the course this year. We see a 10-15% return for stocks over the next 12 months, which would be average for the second 6 months of a new bull market historically.
From a portfolio perspective, our strategy remains unchanged seeking sectors that benefit from the growing digital economy.
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Autumn has arrived, with students back in school, baseball playoffs beginning, and football in full swing. Life is trying to get back to as normal as possible despite the ongoing impact from COVID-19. While the number of new daily cases and hospitalizations from COVID-19 has steadied in the United States, cases in Western Europe are increasing again, and many are concerned the United States could follow Europe with another spike higher.
Although there are still reasons to worry, a number of positives are on the horizon. A major vaccine breakthrough possibly could be here by the end of the year. The U.S. government has plans to ship 100 million Abbot Labs 15-minute COVID-19 tests over the next several weeks to help accelerate reopening of the economy. Meanwhile, Pfizer's clinical trial is expected to produce conclusive results later this month, with Food and Drug Administration (FDA) authorization potentially coming soon thereafter. Johnson & Johnson's vaccine is in the final stages of testing, and promising vaccines from AstraZeneca and Moderna are in the pipeline as well. All of these point to the protentional for an improving global economy in 2021.
While the economy is showing signs of improvement, it also continues to reflect areas of concern. Initial jobless claims have remained stubbornly high. Dave and Buster's reported revenue in the second quarter was down 85%, and Live Nation's revenue was down 98%, as no one was seeing live shows. On the other hand, existing and new home sales both recently hit 14-year highs, and manufacturing has increased for four consecutive months, suggesting the recession is likely over. Amazon has announced it will hire 33,000 new employees at an average salary of $150,000. Certain industries may be years away from fully recovering, while others are moving along like nothing is wrong.
The contrasts in Washington are evident as well, with the presidential election only one month away, but all isn't lost. There's growing optimism that a new coronavirus relief package may still be possible before the end of the year. The Federal Reserve also is doing what it can to help spur confidence and liquidity in the markets. November's winner will inherit an improving economy and one that will likely see strong growth in 2021, as multiple vaccines and therapeutics help spur the economy to open up more fully.
These signs of market and economic strength tell us that better times likely are coming in 2021. Stay safe these final months of what's been a very challenging year. And please contact me if you have any questions.
This material is for general information only is is not intended to provide specific advice of recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal. Any economic forecasts set forth may not develop as predicted and are subject to change.
References to markets, asset classes, and sectors are generally regarding the corresponding market index. Indeses are unmanaged statistical composites and cannot be invested into directly. Index performance is not indicative of the performance of any investment and do not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results.
All date is provided as of September 30, 2020.
Any company names noted herein are for educational purposes only and not an indication of trading intent or a solicitation of their products or services. LPL Financial doesn't provide research on individual equities.
All index data from FactSet.
This Research material was prepared by LPL Financial, LLC. All information is believed to be from reliable sources; however LPL Financial makes no representation as to its completeness or accuracy.