3rd Quarter Gains Continue in the Markets

Dear Clients and Friends,

The financial markets continue to perform quite well here in the last three months of 2020. In this post, I am sharing my quarterly letter to clients covering the 3rd quarter (July - September), with commentary also through October.

The third quarter of 2020 carried forward the favorable performance of stocks, bonds, and Gold from the 2^nd quarter.  The S&P 500 Stock Index gained +8.9% for the three months, and was ahead +5.6% for the year-to-date tally (through September 30^th). I will discuss some data points up through late October when I write this if they are significant. You can look at the stock market’s performance this year in two ways. The huge increase in prices since the sell-off ended; about a +50% gain since the March lows; or since year end 2019, when we are ahead just 1% to 2%; two different tales of this zany year.

Bonds continued their price gains in the quarter, as interest rates stayed low. The shorter Treasuries gained 7-8% in price, while the 20 year Treasury Bond zoomed ahead over 15% (see chart below). The Federal Reserve issued a policy statement in September that they intend to keep short term interest rates near 0% for the next 3 years! They think it will take that long for our economy to fully recover the jobs lost – and for inflation to start to creep above their 2% objective. That’s a bold statement that bodes well for bond prices generally. The flip side of this forecast: bond yields (the rates of interest that are offered investors) are very low now. Many safer bonds pay just 1-3% a year now. 

At the turn of the century, safe Government bonds paid 5-6% - a huge difference. Today investors have to venture to more risky areas of bond investing to get higher interest; such as high yield (junk) bonds, collateralized loans, foreign bonds. Some debtor companies that issue these riskier bonds may not be in business years from now when you are depending on getting your money back. Quite a dilemma. Our strategy is to stay mostly in U.S. Treasury related funds and ETF’s that display low expenses and are very liquid to sell or exchange. When you need the money from the bonds to buy stocks, or Gold, it's comforting to know it's there and has not lost much in value.

The labor department says inflation is running ahead 1.4% year-over-year through September. So you can see there is not much room for positive interest gains after inflation -  owning bonds now – or into 2021-2022. Under our allocation strategy, that’s acceptable, but not ideal. In a diversified portfolio of stocks, bonds, Gold and cash, bonds’ role is to act as a shock absorber to owning stocks, which are almost always more volatile in their pricing as bonds.

Gold Shines in 2020

The price of Gold this year has been nothing short of outstanding! The precious metal is ahead of every major asset class thus far in 2020. Gold ended 2019 at $1,515, so that’s a $370 or +24% gain since then. Gold since September 30^th is ahead $63; most of that gain was today when it popped $40 an ounce to $1,950 (Nov. 5^th).

Gold has done the heavy lifting this year for sure. In the quarter (July-September) Gold added $120 per ounce, or a +6.6%. Long term. Gold prices have gained +20% or higher in 13 of the last 49 years (since President Nixon took the USA off the Gold standard). Meanwhile, stocks are ahead +20% in 18 of those years. 

But … we’re not in a horse race here between stocks and Gold. We own Gold to PROTECT our principal when things get bad with our economy, geopolitical events, with wars, with high inflation, or any unforeseen surprise or disaster (Covid-19) that we can’t see coming at us. I know market history very well on this topic. 

Here's the graph of the three assets plotted year-to-date through October 30th. Stocks (Dow Jones) are green at a 6% loss, while Bonds - purple line (20 year Treasury) is up 17%, and Gold in the blue is ahead 23%. The mixture of all three would be an up year of 11%; about the same as the historical return of stocks over many decades. Not too shabby I have to say.

When this was written, the Presidential election voting had not yet begun. We won't place our money on this or that outcome in the races. Both a Biden and Trump presidency carry risks and rewards for sectors of our economy and our specific financial situations. Being diversified both in your stock market and Bond market investments is the chief driver to more steady returns on your money, and owning some Gold and cash will help you to sleep well also.

Thanks for reading !

 

 

 

 

 

 

 

Gold Prices Ramp Up to 8 Year Highs

Gold prices closed Friday at $1,733 an ounce. That's a fresh high for the precious metal dating back to late 2012. One ouce of Gold is $220 more valuable since New Year's Day, a short 4-1/2 months ago.

In fact, Gold's recent rally is much more pronounced if you look at the multi-year returns. This is shown in the table below, using the standard calculation of compounding annual growth. That shows you the gain required each year to get to your end price of $1,733.

                        Dollar Gain     Compound Growth
 2020                   + $220
One year             + $436              +33 %                                      
2 years                + $440              +16 %
3 years                + $502              +12 %
5 years                + $515              + 7  %
10 yrs.                 + $500              + 3.4%
15 yrs.                 + $1,300           + 9.4%
20 yrs.                 + $1,443           + 9.0%

 
We have advocated since 2011 to use Gold as an insurance policy against financial calamity and unforseen disasters. It may not be needed for that much of the time, but is invaluable when things get scary. This shows you the longer term GAINS in holding Gold across the years, during good and not so good times.

Notice the sub-par returns on the 5 and 10 year holding periods. That's due to the three year Gold year bear market, 2013-15 losing $600/ounce or about 1/3rd.

While you can certainly find many other time frames in which Gold underperformed other investments like stocks or bonds, we still feel a weighting of at least 10% in Gold is warranted now in most diversified (balanced) portfolios.

Gold has experienced a really good century thus far; $100 invested in stocks (S&P 500) grew to $276, while $100 in Gold bullion grew to $566. Besides the three year losses cited above, Gold prices completely ignored the 2000-2002 bear market, and the 2007-2009 Great Recesssion, rising 18% and 70% in those two time spans.

Now, you're a smarter investor, and a Gold afficianado too!
 

Thanks for reading!

2020 Bear Market Extends Coronavirus Losses

The stock market's near 3,000 point loss in Monday's trading now places it in the 6th position in the list of the worst bear markets since 1946!

Here's the table. I have highlighted it in RED in care your tired eyes have trouble reading it. Mine do.

Dates (date range)	Percent Loss	# Months
2007-2009	-54	17
1973-1974	-45	23
2000-2002	-38	33
1969-1970	-36	18
1987	-36	3
2020 - ?	-31.9	1
1961-1962	-27	7
1976	-27	17
1966	-25	8
1946-1948	-24	36
1981-1982	-24	15
1956	-19	19
1978-1979	-16	20

While many stocks are down more than 30%, a few are not as badly damaged; very few. None-the-less, remember the Math. A 30% decline in a stock will take a 43% gain to get back to even. 100 / (100-30).

That may be a tall order, or one that will take months of patience to pull off. I can only hope that you are diversified with some bonds, cash and Gold to partially offset the stock prices falling.

Continuing from last week's post, the stock market's been on an 11 year run, averaging +14.7% compound growth each year. If the historical long term market gain is closer to 10% per year, then consider this.

The Dow Jones could sit here at Dow 20,000 for one full year, and not move - and then you would have your +10% growth rate over the past 12 years! The move from 20,000 to near 30,000 was "gravy" so to speak. In finance, it's called 'reversion to the mean'.

Recall the last sharp BULL run in stocks; 2003-2007, almost a doubler, or +14% each year. We know what 2008-2009 gave us after the bull died (see table). Or how about 1995-1999, another 5 years, with a +26% per year barn-burner.

Then, only to see 37% lopped off prices in the 2000-2002 bear market. If you look then at the bull/bear market 8 year gains, 1995-2002, your back down to a +9.4% average gain. See the pattern here?

So any good news from this predicament? Well, sort of. When bear markets run their course, the ensuing year(s) are usually outstanding - due to pent up demand and better increasing confidence in the economy and earning prospects.

When could that happen? No human knows for sure, but when total despair and surrendar are being displayed - when all sense of purpose as an investor are erased; when there's "blood in the streets", quoted Baron Rothschild, an 18th-century British nobleman and member of the Rothschild banking family. "Buy when there's blood in the streets, even if the blood is your own."

Stay tuned.