On this day, we extend our deepest gratitude to our veterans and their families for their sacrifices on behalf of our nation. The freedoms we enjoy can never be taken for granted, including the freedom to vote, which a record number of Americans did in this recent election. Interestingly, since 1929, the market returns have been remarkably similar whether one party controlled both the Presidency and both chambers of Congress or whether there was a split government. Which party controls the Senate will be determined in a run-off election for both seats in Georgia on January 5. For the rest of the country, it is a relief that the airwaves, text messages and phone calls are no longer filled with political ads 24/7.
Chief financial officers and small businesses will be watching issues like the response to the coronavirus pandemic, fiscal stimulus, taxes, trade, health care and wages. For investors, earnings and interest rates will be the key determinants of the direction of the capital markets. Improving economic activity and stronger than expected corporate earnings helped the S&P 500 rally strongly from the October lows.
The U.S.’s gross domestic product (GDP) saw a record increase from July through September, reversing about two-thirds of the plunge it took in the second quarter. Housing and durable consumer goods made up the bulk of the gain, with the service economy continuing to struggle. However, very promising news on the vaccine front this week has raised hopes for those beleaguered industries. There has been a huge disparity in the performance of market sectors this year (technology is up 36% while energy is down 45%) as investors identified winners and losers from the coronavirus pandemic and lockdown. Those performance differentials could narrow when vaccines and therapeutics are widely available.
Federal Reserve officials made no changes to their commitment to provide sustained stimulus. Fed Chairman Jerome Powell said they were monitoring two prominent risks to the recent rebound in economic activity, one from rising infection rates and another from households exhausting savings after earlier fiscal relief measures had dissipated.
At the end of September, the consensus of analysts was that 3rd quarter S&P 500 earnings would be down 21% from the year ago levels. The actual results were far better than expected as all but two sectors had double digit positive earnings surprises. Forward company guidance relative to expectations hit an all-time high. The stock market has been looking past 2020 earnings for some time, and current expectations are for 24% growth in 2021 S&P 500 operating earnings.
While 2020 earnings are down significantly from last year’s level, dividends from high quality companies increased very nicely again this year. An important characteristic of dividends is that they are cash payments paid directly from the operating business to shareholders. So, they depend on the fundamental performance of the business and effectively bypass stock market volatility.
Our very best wishes to you and your loved ones as we approach the Thanksgiving season.
The LVM Team