Q3 Investor Letter

The third quarter finished strongly after a rocky three week stretch in September.  The S&P was up  8.47% (click HERE to see sectoral breakdown) adding to a record second quarter bouncing off of the  Q1s 20% (click HERE to see sectoral breakdown) draw down.  Technology, healthcare, consumer staples and basis materials have lead the market with transportation, financials, and energy bring up the rear. The estimated earnings decline for Q3 2020 is in excess of 21%, the highest decrease since Q2 2009 of close to 27%. The forward 12-month P/E ratio for the S&P 500 is 21.7, well above  the 5-year average (17.1) and above the 10-year average (15.4).

US Treasuries continued to appreciate with yields heading lower:

12months of U.S. Treasury Yields (1yr, 2yr, 5yr, 10yr, 30yr and 10yr BREAKEVEN Inflation) after NFP October 2nd, 2020
CLICK HERE TO ENLARGE: 1yr of UST Yields (incl 10yr BREAKS) post NFP 9:35a Oct 2, 2020

Key macro market drivers remain in order of importance:

  • The efficacy and timing of approval and deployment of a Covid 19 vaccine
  • The nature and extent of the second wave of infections
  • Further stimulus from Washington, a spike in layoffs and impact on highly impaired State and local governments (NY State downgrade a canary?)
  • The outcome of the November elections and most importantly the ability to garner accepted results in a timely and orderly manner and unite a heavily divided country
  • The Fed remaining accommodative forever and letting inflation run hot (above 2.5%), other Central Banks tag along (ECBs Lagarde suggested as much recently)
  • The level of social unrest

We expect that 

  • One or more vaccines will be approved by year-end, with wide spread distribution by mid-Q2 2021
  • In the next 10 days, additional stimulus with a notional handle of $1.9 trillion will be approved
  • The election is too close to call— the outcome will be in doubt until at least early December.
  • Republicans will push through their nominee to the Supreme Court
  • The healing process will start during the holidays.
  • The Fed will remain accommodative and will continue to express a willingness (but not the need) to buy everything (the other FOMC, commonly referred to as the Fed Open MOUTH Committee)
  • Reckless States and municipalities will receive a partial bailout, coupled with some tough love to trim non-essential expenses   
  • Deficits will continue to balloon
  • Expect unexpected surprises before the election
  • Volatility will increase — a market sell off (10% down or more) before year end is highly probable
  • We will experience a second wave of infections and layoffs
  • Social unrest decreases especially as the weather turns snottier
  • Taxes will need to go up in 2021
  • The Titans win the Super Bowl

We reiterate our recommendation to trim gold, muni and equity exposure and buy bullet proof assets such as US Treasuries on episodic price dips to reduce portfolio risk until after the apocalyptical election — the market dropped ~6% (two weeks after) the last time the Supreme Court decided an election (Bush v Gore). It may make sense to harvest capital gains before rates are pushed up, especially with a Biden victory. For those with higher risk tolerances, consider rotations into out of favor sectors such as energy, consumer discretionary, financials and big cap European growth.

Please consult your advisor for further insight, suitability and risk assessment.

Hang on to your wallet, we are in for a rocky ride

Steven J. Feiss

Managing Director, Fixed Income

Etico Partners, LLC

1795 Rout 9 Clifton Park, NY 12065

Office: (732) 683-9222
Mobile: (914) 450-9668


Meet the Author

Financial markets veteran with more than three decades of experience working with high profile, domestic and international asset managers and trading desks, producing customized and actionable solutions for strategic alpha generation and risk mitigation. Author of a unique daily (6x per week) cross-asset macro market commentary (the BondBeat) to inform and assist INSTITUTIONAL FIXED INCOME investors and trading desks.