Fall 2020 Commentary



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The third quarter saw the market continue its recovery rally off of the March lows, although the pace was more moderate than in the second quarter. July and August posted sizable gains with the S&P 500 rising 5.6% and 7.2% respectively, which brought the index to a new all‐time high. However, September saw the 5‐month‐long rally pause, returning –3.8%. In all, the index has returned 5.6% so far this year. This is a surprise to most considering the economic consequences and uncertainty caused by the COVID‐19 pandemic.

The companies principally responsible for leading the market higher have been those that were best positioned to support the sudden stay‐at‐home environment brought about by the crisis. These are the companies that have made it easy to work remotely and buy the things we need without venturing into crowded stores. Companies like Apple and Microsoft have led the charge in technology, while companies such as Amazon and Costco have led in retail. In many ways, the crisis has greatly accelerated transformational trends that were already occurring in these areas of the economy.

The strong market returns among these technology firms and industry disruptors has led to a significant imbalance in the performance of “growth” oriented companies and slower growing “value” companies. As you can see in the chart below, the difference between the Russell 1000 Growth Index and the Russell 1000 Value Index grew to an astounding 42.6% for the past 12‐months, which is larger than the imbalance that occurred during the late‐90’s tech bubble.

Russell 1000 growth vs Russell 1000 value
This graph is not intended to recommend any investment or investment activity

Recently, however, the market leadership has shown some signs of shifting. During the brief market correction in September, shares in the technology sector, represented by the SPDR Technology Sector ETF (XLK) fell 12.7% over three weeks, while traditional “value” sectors, such as Utilities (XLU) and Consumer Staples (XLP), fell only 4.6% and 6.3% respectively. The extreme differences in performance has also been true in the comparison of large company (large cap) and small company (small cap) stocks. Generally, extreme imbalances such as these have a tendency to correct over time. Many strategists believe the end of the COVID–19 crisis could serve as the inflection point for investors to rotate to these currently unloved areas of the market. For our part, we have recently rebalanced our clients’ portfolios, with the goal of maintaining balanced exposures to both growth and value strategies.

Following the severe pullback in the spring, the economy began to recover in the second quarter and has continued through the third quarter, although the pace appears to be slowing. The overarching concern has been the cloud of uncertainty and fear brought on by the COVID‐19 crisis. Most did not expect the broad disruptions to everyday life to persist this long. Instead of life rapidly returning to normal, as we once hoped, we are adapting to face masks, social distancing, and many different types of restrictions and inconveniences. It appears that this “new normal” will be in place until there is a widely available vaccine, or we learn to better adapt to this new risk in our everyday lives. Sports have possibly provided an example of a way forward. Each of the major sports leagues have resumed play, albeit in a reduced capacity. The playbook they have followed for now appears to be to react when flare ‐ups occur and then keep the season moving forward. Increasingly, it appears that society at large (at least in the U.S.) has adopted a similar strategy.

The upcoming election, of course, is top of mind among many investors. The uncertainty of the possible outcomes as well as emotions tied to politics has an amplified influence on investor sentiment. As we enter the final stretch towards election day, it is important to remember that politicians make a lot of promises that never come to pass, and elected officials receive too much credit and blame for the condition of the economy. Over the long‐run, the U.S. economy has successfully pushed ahead, regardless of who is elected to lead. We discuss the investment implications of the upcoming election in greater depth in a recent blog post.

Our expectation for the remainder of the year is for more of the same; mostly positive returns with bouts of volatility. We are hopeful that once we finally move past the COVID‐19 crisis, and the election has been decided, the economy will recover to pre‐crisis levels and move forward from there. With all of the twists and turns this year, we are reminded that it is nearly impossible to try to “time the market” and that your best chance for success is to follow your long‐term plan, which was constructed with your unique goals and circumstances in mind.

Thank you very much for your continued confidence in our service and advice. If you would like to discuss our opinions, outlook, or your portfolio in greater detail, we would be happy to schedule a meeting or a conference call at your convenience. Lastly, don’t keep us a secret. If you know someone who would like help planning for their financial future, we will be pleased to speak with them to see if we can assist.

Horizon Wealth Advisors is a Houston based fee-only wealth management firm. Horizon is a fiduciary advisor. We specialize in helping successful individuals and families understand, organize, and manage their often complex financial situations. Horizon offers integrated financial planning and investment management services.

Owen Murray, CFA
Owen Murray joined Horizon Advisors in 2005. As a core member of the wealth management team, Owen is principally involved in investment research and portfolio construction.

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