October stock market update

October 8, 2020

This tumultuous year has touched all of us in so many ways, not just financially but in terms of health worries, reduced time with friends or family, or even the loss of a loved one due to COVID-19.

Now we must endure the rest of this election season and any following uncertainty. During challenging times like these, the work we do with clients to match investments to their situation and preferences can be especially important.

Stock market returns through Q3

Stock market update: Short-term vs. mid-term outlook

As we look to the future, our short-term forecast is cloudy, but our mid-term outlook is clearer and more positive.

Short-term cloudiness:

  • Because the stock market does not like uncertainty, we may see volatility through the presidential election and until results are final.
  • We may feel done with COVID-19, but it may not be done with us in terms of future reduced economic activity.
  • We believe that the stock market has priced in additional U.S. government stimulus, likely coming after the election. Lack of stimulus would be a “negative surprise.” Jay Powell, Federal Reserve Chairman, recently shared, “Too little [government support] would lead to a weak recovery, creating unnecessary hardship for households and businesses.”1

Mid-term moderately bullish:

  • After presidential elections, the stock market often rebounds “in relief,” simply due to the increased certainty.2
  • A vaccine is a strong probability for 2021, even if slowly adopted.
  • The Federal Reserve is likely to continue its exceptional support, keeping interest rates low through 2023.
  • While current lay-offs, including those in the airline industry, are a concern, they match our expectation of a “K-shaped” recovery.3 In a K-shaped recovery, some companies, unfortunately will fail – and the stock prices of these at-risk companies are already quite low. However, we believe that most sizeable enterprises will rebuild, both in terms of business revenues and their stock prices, once we are in a post-COVID world. We see this as a mid-term (2+ year) investment opportunity.

Our outlook is moderately bullish vs. highly bullish because we believe our economy and stock market have gotten the “easy gains,” and we may be moving toward a slowing recovery. For example, unemployment recently dropped to 7.9% from its high of 14.7% in April. Reducing unemployment to a “normal” rate of 4% to 5% may take two or more years.

What about tax increases?

Will our moderately positive scenario be marred by tax increases, especially if former Vice President Joe Biden is elected? All things being equal, tax increases tend to dampen the stock market. That said, many other factors come into play:

  • How large is the tax increase, and what is the marginal cost to the corporation or individual?
  • Are the tax dollars spent on infrastructure and/or job creation where dollars are pumped back into the economy?
  • Are tax dollars used to pay down our substantial U.S. debt, now $200,000 per taxpayer? The debt, if not reduced, is likely to dampen the investment markets over time.

In the U.S., we have increased corporate tax increases four times in the post-world war period. Perhaps surprisingly, stocks have rallied all four times, both six months before and six months after each tax increase. We believe this occurred because the tax increases occurred when the economy was doing well. Learn more at Higher Corporate Tax Rate Won’t Necessarily End Bull Market.

If Biden is elected, he would likely need a Democratic Senate to enact substantial tax changes. In addition, his first priority (and President Donald Trump’s as well if he is re-elected) would likely be to enact a stimulus plan. While no one can predict the actions of any administration with certainty, we would hope that tax increases, if any, would come after a COVID resolution with a healing economy. If they do not, we can re-orient your investments to increased international positions in growing economies that have a lower tax burden.

For further specifics on investment strategies we are implementing as suitable, please see Investment Strategies and August market report: Bullish Over Two Years.


1. CBS News. Fed chair Jay Powell pushes for more stimulus, warning of economic “downward spiral”. October 6, 2020.
2. Raymond James Financial. On the Road to Economic Recovery. September 30, 2020.
3. Raymond James Financial. The “U” “K” Economy. April 24, 2020.

Important information. The information on this and the previous page is not intended as a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Expressions of opinion are as of this date and are subject to change without notice. This information is not intended for a solicitation or an offer to buy or sell any security referred to herein. Investments mentioned may not be suitable for every investor. Investing involves risk and investors may incur a profit or a loss, including the loss of all principal. Please note that international investing involves special risks, including currency fluctuations, differing financial accounting standards, and possible political and economic volatility. This may result in greater share price volatility. These risks are heightened in emerging markets. Diversification does not assure profit or protection against loss. Bond prices and yields are subject to change based upon market conditions and availability. If bonds are sold prior to maturity, you may receive more or less than your initial investment. Holding bonds to term allows redemption at par value. Bond prices and interest rates have an inverse relationship. Dividends are not guaranteed and must be authorized by the company’s board of directors. No one graph, chart, formula, or software can in and of itself be used to determine which securities to buy or sell, when to buy or sell them, or assist any person in making decisions as to which securities to buy or sell or when to buy or sell them. Any chart, graph, formula, or software used is limited by the data entered and the created parameters.  Market performance results were obtained from Morningstar.com.

Dow Jones Industrial Average: The Dow Jones Industrial Average is a composite of 30 stocks spread among a wide variety of industries, such as financial services, industrials, consumer services, technology, health care, oil & gas, consumer goods, telecommunications, and basic materials. The index is price weighted (component weightings are affected by changes in the stocks’ prices).  S&P 500: Representing approximately 80% of the investable U.S. equity market, the S&P 500 measures changes in stock market conditions based on the average performance of 500 widely held common stocks. It is a market-weighted index calculated on a total return basis with dividend reinvested. MSCI EAFE (Europe, Australasia, Far East) Index: A free float-adjusted market capitalization index that is designed to measure the equity market performance of developed markets, excluding the U.S. and Canada. As of June 2, 2014, the index consists of 21 developed market country indices: Australia, Austria, Belgium, Denmark, Finland, France, Germany, Hong Kong, Ireland, Israel, Italy, Japan, the Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, and the United Kingdom. BBG Barclays Aggregate Bond: A representation of SEC-registered, taxable, and dollar denominated securities. The index covers the U.S. investment grade fixed rate bond market, with index components for asset-backed securities, government and corporate securities, and mortgage pass-through securities. Must be rated investment grade (Baa3/BBB- or higher) by at least two of the following rating agencies: Moody’s, S&P, Fitch; regardless of call features have at least one year to final maturity, and have an outstanding par value amount of at least $250 million. Russell 2000: The index measures the performance of the small-cap segment of the US equity universe. It is a subset of the Russell 3000 and includes approximately 2000 of the smallest securities based on a combination of their market cap and current index membership. BBG Barclays 1 – 3-year Treasuries: The index measures the performance of the U.S. Treasury and U.S. Agency Indices with maturities of 1-3 years, including Treasuries and U.S. agency debentures. It is a component of the U.S. Government/Credit Index and the U.S. Aggregate Index. BBG Barclays Municipal 5 – 10 Years: An unmanaged index of fixed-rate, investment grade municipal securities with maturities from five to ten years.

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