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Investment Letter

3rd Quarter 2020

The first three quarters of 2020 were an extraordinary period as any we can remember. The unknown pandemic variables and potential outcomes induced tremendous stress on the country and economy. While the summer months provided a hiatus for many to escape and forget all these troubling issues, the reality of an end to this ordeal through a successful vaccine solution is most likely many months away. Fortunately, the economy has been resilient in the face of uncertainty and improved further during the recent quarter. We were delighted to witness the return of worship and sports in limited capacities, as well as local governments and businesses creating innovative ways to operate under safety mandates. Despite some improvement, COVID protocols and precautions continued to impact most aspects of businesses, schools, and personal lives across the country. The ramifications upon life serve as a constant and firm reminder that daily activities in the pandemic world continue to be a struggle. 

The broad-based recovery in the financial markets continued further during the quarter as domestic (large and small cap) and international (developed and emerging markets) stocks delivered solid performances. The tech-heavy NASDAQ index enjoyed a quarter of 22 new all-time closing highs and posted a total return for the quarter of +11.24%. The S&P 500 index also enjoyed a run of 9 new all-time closing highs in a stretch of 12 days to end the quarter with a total return of +8.93%. While the Dow Jones Industrial Average did not set any new all-time high closing records, the index finished the quarter with a total return of +8.22%. If not for a dismal end to September, investor profits across the board would have been even higher. 

Given the severe decline in equities earlier this year, a positive return outcome for 2020 was not promising for investors. Amazingly, the 2nd and 3rd quarter gains have erased a significant portion of the damage done by the COVID-19 financial shock. Investors are now in a good position to end the year on a positive note, but further improvement is needed to reverse negative year-to-date total returns in real estate, domestic small cap, and international stocks. 

Economic data showed stable improvement across most sectors. The robust growth in the housing market and increased spending on home improvement projects have been a pleasant surprise. Both are byproducts of social interaction restrictions as people are focusing on family and home enjoyment. Add low interest rates and supply shortages into the mix and the conditions have allowed this area of the economy to flourish. A strong housing market is almost always a key component for sustained economic improvement.

At the Federal Open Market Committee (FOMC) meeting in September, the Fed confirmed economic data was better-than-expected as growth and the pace of declines in unemployment were faster since the last meeting in July. Financial conditions were reported as an area of improvement due to policy measures, increased flow of credit to household and businesses, stronger corporate earnings, and declines in new U.S. COVID-19 cases. Weaker demand and low oil prices were contributing to consumer price inflation below the target range, and the Committee identified the pandemic uncertainty as a weight on overall economic activity. The FOMC communicated their expectations to include the following for the remainder of the year: subdued inflation, additional fiscal policy support, a slower pace for the economic recovery, a gradual ease to social interaction restrictions, and a more accommodative monetary policy. Regarding monetary policy, the Fed pledged to increase its balance sheet holdings and decided to maintain the target for the federal funds rate at the current range of 0.0 – 0.25 percent. A new policy called the “Average Inflation Targeting” strategy was also adopted that will allow the Fed to promote inflation moderately above the two percent goal for the foreseeable future. Due to inflation consistently running below their goal, the Fed agreed the new strategy will help achieve a return to their longer run expectations. Lastly, the Committee reiterated their support for the economic recovery, and stated they will continue to assess a wide range of information and adjust the stance on monetary policy as needed.

Our outlook for the last quarter of 2020 and the first part of 2021 remains guarded. We are ecstatic the economy is showing signs of significant improvement, but we also recognize the fact a full recovery will take time. Life and work adjustments continue to be a challenging hurdle for many, but the country seems to be adapting to the new normal. The election process has been eventful this year, and with all the uncertainty surrounding the outcome, volatility in the financial markets has increased. We believe this short-term volatility will continue through the election cycle and probably for a term after the election. Another round of fiscal stimulus should be on the agenda at some point, but with the election so close, it is hard to foresee an agreement on the stimulus until later this year. We expect the Fed to continue their support and maintain their accommodative monetary policy indefinitely to promote the new strategy for higher inflation. That essentially means rates will be low for an extended period and liquidity will be plentiful. We are hopeful the worst of the health care crisis is behind us, and we anticipate the economic improvement around the globe to continue at a sustainable rate over the next few months and into next year.

Each Presidential election is a unique experience, but 2020 has seen an intensity from both sides that has amped up the stress level a notch or two. Regardless of your political affiliation, the best advice is to stay calm and keep your emotions in check. Do not let your political passions overrule your investing principles. The election outcome does not absolutely dictate the direction of the economy and the financial markets. Economic growth and stock market gains have been achieved during periods of divided government and one party-rule. 

Year-end tax planning season is here. See the list below to identify some common strategies that can help reduce your tax bill. 

•         Take advantage of high Federal Estate and Gift Tax exemptions (expire in 2025).

•         Contribute the maximum amount to retirement plans.

•         Contribute to a 529 Plan.

•         Defer or accelerate income and expenses.

•         Gift appreciated property.

•         Maximize the itemized deduction benefit through additional charitable gifts.

•         Manage investment gains and losses.

•         Monitor tax liability estimates and adjust withholding/estimated tax payments to avoid underpayment penalties.

•         Consider a Health Savings Account (HSA) if you participate in a high deductible health insurance plan. Allows pre-tax savings to pay for qualified medical expenses.

•         For 2020 only - No Required Minimum Distributions (RMDs); Suspended by the CARES Act.

•         Qualified Charitable Deduction (QCD) still available for IRAs in 2020.

•         Consider converting traditional IRA assets to a Roth IRA.

If you would like to discuss changes to your financial situation, schedule a virtual meeting, or have any questions, please contact our office.

As I have often stated, our investment philosophy remains based on the fundamentals. We believe it is time---not timing---that matters most. The successful long-term investor is patient, weathers market swings, and adheres to a disciplined investment process. 

In closing, I want to thank you for the opportunity of working with you and for your continued confidence and trust. I wish you and your family good health.

With kindest personal regards, I am

Very truly yours,


2020 Total Return Index Performance
Asset Class
BofA/ML Three-Month U.S. Treasury
U.S. Bonds
Barclays Intermediate-Term Treasury
U.S. Large Co. Stocks
S&P 500
U.S. Small Co. Stocks
Russell 2000
International Stocks
MSCI EAFE (net div.)
Real Estate
DJ Select Real Estate Securities Total Return
Source: Morningstar


    U.S. Economic Data



31.4% decrease (annual rate) – 2ndQuarter 2020



1.7% CPI (less food and energy) and 1.3% CPI (all items) over last 12-months ending August.


Interest rates

Federal Funds Rate range = 0.00 – 0.25%. Last action March 2020 adjusted down 1.0%



September 2020 data - Unemployment at 7.9%; 661,000 non-farm payroll jobs added; Labor force participation rate 61.4%; Notable gains occurred in leisure/hospitality, retail trade, health care, and professional & business services.



Manufacturing activity expanded for 5thconsecutive month after contraction in April; September ISM Manufacturing Index registered at 55.4; Sentiment was optimistic as manufacturing performed better with demand, consumption, and inputs returning to more normal levels.


Business Spending

Private non-residential investment negatively impacted by pandemic and remained lower; New durable goods orders increased 0.5% in August following a 11.8% July recovery.


Corporate Profits

2ndQuarter 2020 - U.S. corporate profits decreased by 10.3%. S&P 500 Earnings per share = $26.79



August 2020 year-over year data - New home sales up 43.2%; Existing home sales increased 10.5% %; Median sales price of existing homes rose 11.4% ($310,600); Housing starts expanded 2.8%; Building permits decreased 0.1%; Housing inventory decreased 18.6% from last year; Unsold inventory = 3 month supply; MBA fixed 30-yr mortgage rates = 3.01% ending 10/02/2020


Consumer Spending

Disposable income decreased; Consumer Confidence Index increased during the quarter based on favorable business and labor market conditions; Retail and food services sales improved; Total vehicle sales climbed higher; Personal durable and nondurable spending rebounded; Savings rate = 14.1% in Aug. Down from 33.6% in April.



Oil price (West Texas Intermediate) = $40.05/bbl – 09/30/2020; Gas price (U.S. average regular unleaded) = $2.169/gal – 09/28/2020



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