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Preston Galarneau
Deborah Galarneau

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THIRD QUARTER NEWSLETTER

     When we wrote our Second Quarter Newsletter, the domestic equity market had already made up much of the ground lost from COVID-19 related selloffs. Major stimuluses were passed, hospital beds, equipment, and materials to test and treat severe cases were in good supply, and new treatment strategies were showing promise. With summer weather making outdoor activities more available, and news of vaccines in development, many looked forward to starting back on the road to normalcy. The country spent the summer balancing prudent reopening of the economy with the ongoing threat of COVID. This period held both encouraging signs and troubling setbacks in the medical field and in business. Markets, however, continued to improve, in part due to consumer spending. Dr. Sonai Desai, CIO of Franklin Templeton Fixed Income, (2020) stated:

                The health of the recovery was soon tested by a second wave of contagion in July, when COVID- 19 cases rose anew. The recovery showed an encouraging degree of resilience. The improvement in economic activity and employment slowed but did not kick into reverse. The second pulse of our Franklin Templeton–Gallup Economics of Recovery study, conducted in early August, showed that Americans’ willingness to engage in different economic activities, from shopping to traveling to going back to their places of work, was not set back by the resurgence of contagion. Our study also highlights that a majority of Americans intend to keep increasing their savings over the coming months, but not pay down debt: they remain prudent in the face of the health and economic uncertainty, but are again accumulating spending power to deploy once the uncertainty abates. (Desai, 2020)[1]

     The 10/02/2020 week ending cumulative returns from Franklin Templeton reported on Oct. 5, 2020 were as follows:

S&P 500

 YTD UP 5.1%

1 YR UP 18.2%

DJIA

YTD DOWN 1.3%

1 YR UP 8.7%

NASADAQ

YTD UP 24.3%

1 YR UP 43.6%

FOREIGN STOCKS

YTD DOWN 6.7%

1 YR UP 3.1%

EMERGING MRTS

YRD DOWN 0.9%

1 YR UP 12.2%

Top Three S&P 500 Equity Sectors YTD: Information Technology +26.6%, Consumer Discretion Services +23.9%, Communication Services +7.9%[2]

     Competing for news coverage with COVID-19 is the upcoming Presidential Election, now just a few weeks away. We are often asked what we think will happen with the markets in a scenario where Trump wins reelection, or one in which Biden is elected. Our investment strategy focuses not on guessing who may win and what may happen if they do. Rather, we are monitoring market action in the weeks leading up to the election for possible short-term volatility, prepared to be more defensive if needed, or take advantage of buying opportunities. We have been defensive throughout the year, raising cash to be ready for deployment at the right time.  

     We have seen several people predicting sectors or asset classes that may do best, depending who wins the election. Grant Bowles, Senior Vice President and Portfolio Manager for Franklin Templeton writes, regardless of the winner, there are three areas of focus post-election. We have infrastructure spending (roads, airports, etc.), technology infrastructure, which he feels will increase in either case, ‘reshoring’ jobs back to the states, and fiscal stimulus, as we continue to support the economy through COVID. He says, “we see the prospect of a ‘Blue Wave,' or a Democratic sweep worth monitoring. In our view, investors and market participants share concern about a single party having unchecked power across all 3 branches of government.”[3]

     This September, Dorsey Wright reported they believe “the recession is over and the recovery has begun…. Vaccine is a when, Republican Senate is an if.” Two of the things Dorsey Wright will look for are whether or not higher tax rates fade post-election, “with responsible fiscal spending plans that don’t explore the limits of debt monetization, and ‘vaccine progress’ that might signal this is the last winter of COVID.”[4]

    On the fixed income side, many analysts see opportunities in municipal bonds, which fared less well during the early weeks of the COVID crisis, as people forced to sell to raise cash for other purposes ran into illiquid markets. With steps taken to ensure liquidity in the market, munis recovered, and have positive YTD and 1-YR returns according to Bloomberg Barclays Municipal Bond Index for week ending 09/25/20, with the lowest YTD and 1-YR returns and highest current yield among Treasuries, U.S. Bonds, Global Bonds, and Munis.[5]

     Recently Lord Abbott has said the muni market should be “in good shape” after the election, “regardless of which candidate wins,” citing a favorable tax equivalent yield if Trump wins, and higher tax rates for both individuals and corporations likely if Biden wins; increasing the demand for tax free munis. They also see increased spending on infrastructure whoever wins, which should increase the supply of municipal bonds.[6]

     We will watch with interest as the month of November unfolds, and expect that we will need to wait several weeks beyond Halloween to see what Tricks and Treats may come our way. We look forward to seeing you, either in the office or on virtual meetings, and talking with you whenever you want to give us a call. As we approach the holiday season, it is not too soon to wish you all happy, healthy holidays, and a safe and prosperous New Year. Our relationships with each of you are the greatest gift we could ask for and we cherish them.

 

Warmly;

The Galarneau Group

 

 

[1] Dr. Sonai Desai, Franklin Templeton Fixed Income, Oct. 1, 2020, On My Mind: A Strong Recovery, Many Challenges

[2] Franklin Templeton, Oct. 5, 2020, What Happened Last Week + Anatomy of a Recession Update: advisorservice-us@franklintempleton.com.

[3] Grant Bowles, Franklin Templeton, Oct. 1, 2020, Outlook and Implications for the Upcoming U.S. Election

[4] Dorsey Wright, Sept. 21,2020, Election and Vaccine Equity Strategy: www.dws.com/en-us/insights

[5] Franklin Templeton, Bloomberg Barclays Municipal Bond Index, Sept. 25, 2020, What Happened Last Week

[6] Lord Abbott, Oct. 5, 2020, Municipal Bond Markets and the 2020 Election

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