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 2nd 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 30th). 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 30th is ahead $63; most of
that gain was today when it popped $40 an ounce to $1,950 (Nov. 5th).
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 !
