“Black swans” are unpredictable high-impact events that shape capital markets more than most people realize. Long before Covid-19, scientists knew that the global spread of a zoonotic respiratory virus was possible, but very few people understood the economic consequences. The International Monetary Fund forecast estimates that global GDP may be 8% lower than it would have been without the pandemic. As a benchmark comparison, the 2008-2009 “great recession” resulted in a 0.1% contraction of the world economy.
Considering this, the recovery in equity markets has been remarkable and has led many to wonder if it is sustainable. Much of the recovery can be attributed to unprecedented levels of central bank intervention and fiscal stimulus. In the US, the Federal Reserve balance sheet has ballooned to $7.2T. The IMF forecasts that the public debt to GDP ratio of advanced economies will expand from 105% in 2019 to 132% by 2021.
Add to this scenario more uncertainty around the upcoming November elections in the US. While history teaches us that the party that prevails has little predictive power over asset prices, the possibility of a contested election and the associated social unrest has the potential to create a very high level of volatility.
Against this backdrop, we believe that there has likely never been a more important time to have a financial plan in place to help frame critically important decisions and avoid emotional responses to what may be a stressful period. If you have a plan, we encourage you to review it with your advisor. If you don’t, it’s not too late to get started.
We hope that you find the Q3 Market Review interesting and informative. Of note is the article discussing growth versus value stocks and their expected returns. With the value spread currently at the 100th percentile historically for US stocks, the expected return for value stocks is certainly compelling.
As I close, I again encourage you to contact us if you don't have an advisor or a plan already in place.
View our Q3 2020 Market Review.
J. Brent Everett
Chief Investment Officer
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