Third Quarter 2020 Market Recap
“I have observed that not the man who hopes when others despair, but the man who despairs when others hope, is admired by a large class of persons as a sage.” John Stuart Mill (1828)
“I am not an optimist. That makes me sound naïve. I am a very serious possibilist. It means someone who neither hopes without reason, nor fears without reason, someone who constantly resists the overdramatic worldview.” Hans Rosling
A seeming whirlwind of events makes it difficult to neatly summarize the forces shaping third quarter results in a few paragraphs, yet the market (as measured by the MSCI All Country World Index) rebounded off second quarter lows, rose a remarkable 8.1% in the third quarter and is now up 1.7% for the year. An unfettered global pandemic, severe economic recession, pivotal U.S. election, plus natural threats (think California wildfires and Gulf storms), have rightly placed concern front and center in investors’ minds. Evolutionary scientists suggest that humans are hard-wired to look for danger and the familiar fight-or-flight response has been fundamental to our survival. When someone says, “watch out,” we tend to react more strongly than if someone says things are good or getting better.
But, paradoxically, can things be getting worse and better at the same time? As investors, the answer appears to be yes – here are several examples: 1) The widely discussed K-shaped recovery splits growth unevenly among sectors and income levels. Even while unemployment remains stubbornly high in parts of the economy, numerous companies and their employees have been prime beneficiaries of new trends. 2) Yields are stuck to a floor set by the Federal Reserve leaving bond investors stymied by a lack of opportunity, which may now extend through the end of 2023. However, very low yields (10-year Treasury at 0.69%) have driven a stock market rebound that has created high valuations and a buoyant IPO market. 3) Conventional energy producers’ stocks have declined almost 50% this year. ExxonMobil was once the world’s largest company, but now the world’s largest producer of renewable energy from solar and wind, NextEra, recently surpassed it in market value, heralding a potential changing of the guard.
The short-term outlook is clouded with challenges, and the market’s creative tension between the bears and the bulls may not be resolved anytime soon. Skepticism is a healthy impulse when it comes to investing, but, as John Stuart Mill points out, it is worth acknowledging our evolutionary tendency to be gripped by the negative. Optimism is also a necessary pre-condition for successful investing – as change and innovation alter current trends and lead to a brighter future. At this stage, investors should maintain a healthy, but not overly dramatic skepticism in the near-term, yet remain optimistic about opportunities that will emerge in the future.