Q3 Blog Feature Image

Q3 | Fear, Stimulus, & Stock Prices

We noted earlier in the year that the direction of the market can largely be explained in one simple theory: Virus Fears Easing + Massive Stimulus = Rising Earnings Expectations = Rising Stock Prices. This theory continues to prove itself.

Much as the rest of 2020, the Coronavirus pandemic continued to be the dominant topic in the 3rd quarter. The U.S. continued to be the global leader in both cases and deaths per day as the Stay-At-Home orders and business restrictions were lifted and the country attempted to return to normal. Continuing to defy expectations, the S&P 500 index has gained +50.31% from March 23, 2020 to the close of the 3Q 2020 period on September 30, 2020.

We noted earlier in the year that the direction of the market can largely be explained in one simple theory: Virus Fears Easing + Massive Stimulus = Rising Earnings Expectations = Rising Stock Prices. This theory continues to prove itself.

At the end of the 2Q 2020 period, the estimated number of deaths from the virus was 130,000 in the U.S. By September 30, 2020, the estimated number of deaths in the U.S. from the virus was 212,000. While the absolute number of deaths is shockingly high, we are encouraged to see that the combination of treatments and experience are having a positive impact on the medical community’s ability to keep the death rate much lower than in April-May. This data set, while morbid (and extremely insensitive to those who have lost someone to COVID), is important to monitor as we enter the winter months.

Politicians continue to remain unproductively deadlocked in their negotiations about an additional stimulus package. While economic conditions have improved, the fact remains that the unemployment rate is at historic levels and the enhanced unemployment benefits and direct payments to U.S. households played a major role in avoiding a catastrophe. Additional stimulus will be necessary to support the economy until such a time as either a vaccine or improved therapeutics allow for a return to normalcy.

U.S. Deaths from COVID-19 on a rate of change basis

Are stocks now overvalued?

As we explained in our last quarterly commentary, stock prices discount future earnings and cash flows. What is currently happening in the economy is irrelevant for stock prices.

To this point, stock market gains during the 3Q 2020 period were based on the expectation of improving future economic conditions. S&P 500 EPS expectations have been the best that we have measured in over ten years and stock prices have moved higher as a result. The results of early 3Q 2020 reporters within the S&P 500 that released financial results during the month of September validate that there is a continued expectation of future economic improvement. Collectively, early 3Q 2020 reporters have had better changes to their earnings expectations than what we measured last quarter.

What about bonds?

Ten-year U.S. Treasuries began the year with a yield of 1.92%. By the end of the 3Q 2020 period, the yield has dropped to 0.69%. This means global investors remain so fearful that they ran into the safety of bonds willing to lock in an interest rate below 1% for the next ten years. This should reinforce how much fear there still is in financial markets.

Outlook for 4Q 2020:

As we look ahead to the 4Q 2020 period, we anticipate economic growth will become less negative. Under improving economic conditions, and especially with additional stimulus, stocks will have ample tailwind to hit and potentially exceed new all-time highs again.

What could change this? In order, the biggest risks to the market are: 1) COVID-19; 2) Failure to reach an additional stimulus package; 3) The U.S. Presidential Election. If we continue to see daily cases, hospitalizations, and deaths climb the odds of a second wave of business closures increase. Some degree of stimulus is needed for sustained economic recovery. Failure to come to an agreement will result in significant economic damage, particularly in the Real Estate and Financial sectors as time is running out before massive evictions and deferred rental payments kick in. Finally, we come to the election. While important, historically the market has been little impacted in the long-term by Presidential elections and we see this again being the case. We will be hosting a webinar on December 8th at 2:00pm EST to delve further into this topic.

We want to remind everyone to remain positive and optimistic. This has been a challenging year and we could be in for an even more challenging 3-4 months. But this period will pass. Kids will go to school, friends and families will gather again, and the pandemic will end. We expect things to improve incrementally beginning in the Spring of 2021 with substantial improvement by Fall of 2021.

Share this post

Share on facebook
Share on twitter
Share on linkedin
Share on pinterest
Share on print
Share on email

Important Notice

You are now leaving the Auxin Group Wealth Management, LLC (“Auxin Group”) website and will be entering the Charles Schwab & Co., Inc. (“Schwab”) website.

Schwab is a registered broker-dealer, and is not affiliated with Auxin Group or any advisor(s) whose name(s) appear(s) on this website. Auxin Group is independently owned and operated. [Schwab neither endorses nor recommends Auxin Group, unless you have been referred to us through the Schwab Advisor Network®. (This bracketed language is for use by Schwab Advisor Network members only.)] Regardless of any referral or recommendation, Schwab does not endorse or recommend the investment strategy of any advisor. Schwab has agreements with Auxin Group under which Schwab provides Auxin Group with services related to your account. Schwab does not review the Auxin Group website(s), and makes no representation regarding information contained in the Auxin Group website(s), which should not be considered to be either a recommendation by Schwab or a solicitation of any offer to purchase or sell any securities.