After five consecutive months that saw the MSCI EAFE index deliver positive returns, September was down -2.60%. Despite this fall, September was a good month for materials, industrials, consumer discretional, information technology and communication services. We were over-weighted in consumer discretionary and information technology and underweight in financials, which generally helped our portfolio performance on both fronts.
As we tumble headlong into Autumn, our question is whether the overall September slump is a blip in the market’s performance that has defied the destructive effects of the pandemic to this point, or is it a sign of things to come for the fourth fiscal quarter and first half of 2021? Of course, it is entirely possible for an economy to be in a midst of a recession while markets go from strength to strength; indeed, if there was any doubt COVID-19 has made it unequivocal. Jobs and businesses are under threat and in many cases are evaporating, and yet those with money in the market for the most part have become wealthier.
In spite of COVID-19’s drag and the recent market blip, global economic growth has remained strong and September marked the 5th consecutive month of falling unemployment in the US, which has diminished to 7.9%. To put this into perspective in February the unemployment rate was at the 50 year low of 3.5% and then after the outbreak it reached a high of 14.7% in April. There was additional good news during the month when the consumer sentiment index improved for the second month in a row in September. The index and lower unemployment further points towards a V shaped recovery for the US.
Yet, despite our optimism and the market’s pandemic track record so far, COVID-19 has more than enough poison to bring equities to their knees. While the US’s COVID-19 infections and deaths were less in September, the numbers were still unnerving: 1.16 million infections and some 22 thousand deaths. The spirit of optimism begs us to think our numbers will continue to diminish; however, using the rest of the world as an example, even the most fastidious measures are no match for the winter season encroaching upon us (and, let’s be frank: our measures in the US are far from fastidious). It consequently stands to reason that we will see a second wave, too. Of course, it is a possibility that the second wave will be more benign than the first – but a second wave of any sort will likely not be good news for investors. Latin America, for instance, consolidated its place atop the league table in September for total cases and deaths, at 9.6 million and 350 thousand, respectively. Markets responded by falling by -5.11% as measured by the MSCI Emerging Markets Latin America index. Europe and Britain are fully in the midst of its second wave (a thoroughly un-benign one, we might add), with the former’s equities falling by -3.32% in September as measured by the MSCI Europe index and the latter’s by -4.98% as measured by the MSCI United Kingdom index during this same period. Unless the pandemic improves, one does not imagine these numbers will change dramatically, or really at all. Indeed, should things continue to worsen, one would not be surprised to see U.S. markets erode even further. If a second wave is damaging market performance in the rest of the world, it would be naïve to assume it will be different back home.
Of course, optimism may be an easier ideal to embrace if a vaccine were just around the corner. Yet, despite what President Trump may suggest, a more clear-headed assessment of the facts would suggest that positive phase 3 trial results may be available any day now to the middle of next year. If results are positive, a vaccine could receive regulatory approval within a month, which experts believe would allow for early dissemination to vulnerable groups and front line key workers shortly thereafter. However, it would still apparently take another 6 months for full phase 3 trial data results to come in and be analyzed before mass public vaccinations could begin – and this would assume that everything every step of the way will go according to plan. In short, if we listen to the doctors and scientists, most of us will not have a vaccine at our disposal for a good while yet, which – aside from the worrying health realities that entails – suggests markets will have unusual volatility influencing them well beyond winter 2020/21.
But it is not all dire news: we are now pretty good at fighting COVID-19 once somebody is infected, in terms of anti-viral drugs, steroids and antibody treatments. Indeed, the poster boy for the effectiveness of such a cocktail is President Trump, who has apparently convalesced very nicely. Of course, while we all should be eager to remember that most of us are not afforded the same level of healthcare enjoyed by the leader of the Free World, the evidence is clear to see that the medical community actually knows how to fight COVID-19. Despite infections continuing to soar, death rates are very low, and one assumes that our ability to treat the virus will only improve, too, which is a great cause for hope for our lives and health in a pre-vaccine world. Of course, it is also brilliant news for economies and markets as it may well be possible to live, spend and consume with relative liberty while COVID-19 is hanging over us.
Last month we asked if governments and central banks had the appetite (or liquidity) to bail everyone and everything out again. In America ‘appetite’ may have been the wrong word, as the impediment seems to be rather pre-election partisan bickering which is blocking any chance at a modest stimulus package. As ever, we hope cooler heads prevail. This often seems like a vain hope and yet it frequently materializes at the last moment. In the UK, Chancellor Rishi Sunak is attempting to be more financially conservative (ironically not difficult given how the economy was effectively nationalized for 6 months) in his attempt to offer another lifeline to workers and business; however, it is becoming increasingly apparent that the UK’s second wave will likely require something a bit more similar – or even more robust than – his fiscal response to the first wave. According to European Central Bank President Christine Lagarde, wide-ranging fiscal support is essential to guide economies through the pandemic. We agree and hope that governments and central banks will not lose their nerve and recognize that they must keep digging into their pockets if economies (and markets) are going to be in relative ship-shape at the end of the pandemic.
The final item to touch upon before we check out is the November 3rd US General Election. While it may stand to reason that a Trump victory may be a good thing for markets in the short term – and possibly even beyond – and a Biden victory may temporary subdue equity performance – one would be wise to remember that markets can succeed and fail in both Republican and Democratic White Houses. What is more, the performance of the stock market is generally based on both current and perceived future corporate earnings. Based on this, we believe that markets are predicting better times ahead above and beyond the transient joy/dismay the winning and losing sides will feel once the election’s result is declared. With that in mind, maybe the markets know something we all do not: that a vaccine is imminent; that economies are resilient enough to have a V-Shaped recovery in the face of adversity; that markets will continue to perform; that life may return to normal sometime soon? We certainly hope so.
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