Despite giving back some ground in September, the broad stock market rebound from the sharp March-April COVID selloff continued in the third quarter. In fact, the S&P’s nearly 9% gain in Q3 more than erased the early losses, leaving the index solidly positive for 2020 to-date. As we detailed recently in our blog “The Narrowest of Markets” (August 14, 2020), the recent performance of the major indexes doesn’t necessarily tell the story of the average stock because so much of the gains has been driven by five behemoths that dominate the capitalization weighting within the S&P 500: Apple, Amazon, Facebook, Netflix, and Alphabet (Google).
Even so, most stocks have recovered much more quickly than most strategists and money managers anticipated, which reinforces our conviction that a consistent strategy is key. Maintaining a consistent strategy is much different than a “do nothing – wait it out” approach. It means doing all of the things that one does continually in all market environments – not changing tactics in reaction to additional volatility, for example. It includes doing fundamental research to identify stretched or overvalued holdings and also undervalued opportunities. It also means maintaining discipline with regard to asset allocation targets and rebalancing when necessary (even if it doesn’t feel good at the time). This is the tactical portfolio management work that we do daily as part of our process. When done properly, it positions clients’ portfolios in a way that eliminates the need to avoid each correction or bear market with big market timing moves. Doing so would be to completely change strategy short-term, which would then have to be reversed at some point to accommodate yet another strategy (perhaps the original).
The tug-of-war between a COVID-19 resurgence and positive news on the vaccine front is still very much happening in markets, but investors are now training one eye on next month’s election while keeping the other focused on the virus. As we saw in 2016, it is difficult to predict election outcomes. It is even more difficult to predict how stocks might react to various results. Suffice it to say that markets are constantly assessing and “pricing in” the ever-changing dynamics and probabilities. The consensus worst-case scenario is no clear winner on November 4th, but even that outcome would not completely derail markets because the possibility is already being widely discussed. It would likely not be positive for stocks as things are being sorted out but would be resolved eventually. If the pandemic has taught us anything, it is that stocks can rebound coincident with remaining uncertainty.
Stocks represent ownership in real companies run by people. These management teams are tasked with operating their companies profitably in varying regulatory and economic climates. Depending on the post-election combination of leaders in Washington, incremental headwinds or tailwinds might shift or intensify for certain companies. The best management teams – and their companies and stocks – will figure it out and continue to perform.