Third Quarter 2020 Outlook What Does it all Mean? By: James C. Denton, CFP®, Managing PartnerJuly 1, 2020 Back at the end of March, I told you to ignore your quarter-end statements as largely meaningless point-in-time snapshots and not terribly accurate reflections of big-picture economic or market conditions. That turned out to be a reasonably accurate assessment under the circumstances as the market recovered much more quickly than any of us would have hoped for, much less been willing to predict. This time around, those reports will be much more palatable but may be just as meaningless. 2020 is half over, and on any given day the market is somewhere in the general vicinity of 5% down from where we started the year. Oddly enough, this is about what I would have predicted if pressed at the beginning of the year, without any expectation of a pandemic or other market-moving event. We had a very good year in 19, we were getting ahead of where we should have been based simply on reasonable valuation principles and a normal correction would have been neither unexpected nor particularly distressing. Regardless of how we got here though, here we are. My expectations at this point for the remainder of this year, or at least until early November, are equally circumspect. COVID-19 factors continue to be a huge wild card. A medical solution could be hugely appreciated by the market, but I fear such an outcome is very unlikely and would be short-lived in any event. Were I confident enough in my own predicting abilities specific to the health situation, I might be more optimistic about our ability to deal with and get through it, but what do I know? And that’s a big part of the problem: 330 million different opinions on what the correct medical, economic, political, and societal responses should be and no systemic strategy for the path forward. The arguments within my own six-foot range of influence are robust and sometimes hurtful; outside of that circle I am baffled. And there is zero effective political leadership from either side of the spectrum. But COVID aside, and regardless of how it turns out, the market’s attention is now turning to the elections, and the market doesn’t like what it sees. Just one man’s opinion here, but I think many of us see this as a no-win situation. We have two tremendously flawed candidates running for the Presidency. Regardless of which one wins, there will only be a celebration among perhaps 20% of the population, a huge sigh of relief among another 25% or so, but I fear a sizable portion of the population will be at best, conflicted on the ultimate outcome, and unhappy with the changes it may bring. So, I suspect we may have gotten a bit ahead of ourselves once again, and surprises over the next few months are more likely to be setbacks than they are unexpected improvement. The Federal Reserve and the Treasury have shown a commitment to do what is necessary to prevent a disastrous shut down of the economy, but too much of the recovery in the market seems to me to be a dependence on this stimulus rather than improvements in the business sector. Accordingly, steady sideways performance is probably the most prudent expectation from here, and a fairly significant pullback would not be a big surprise. “What does it all mean?”. Ah, yes. Again, the age-old question: Relevancy. And you know the answer to this. We do not design our portfolios, and we do not manage our investments, to conform to certain expected or predicted outcomes. Our worst expectations frequently turn out to be wrong, and actual events, for better or worse, are seldom expected, or as significant in their impact as we might have imagined. Outcomes change, can change in a matter of minutes sometimes. No one expected Donald Trump to be president before the votes were actually counted. Yet here we are. And a lot of things can happen between now and November, including, conceivably a change in one or the other of the candidates. (Perhaps, even both; they are both old men, after all. Just about anyone who is over 70, I suspect, and I speak with first-hand knowledge, is appalled at the prospect of a mid-70’s year old human being assuming the responsibilities of the Presidency.) So, to make wholesale changes to our overall investment strategy against an expected outcome is to make a bet on that outcome. And we are not gamblers. Remember, your portfolio is a reflection of what is appropriate based on your LONG-TERM investment goals, objectives, situation, and how the market has performed historically in all kinds of economic circumstances. We are always surprised by events. Happens all the time. But if you look at our performance over time, we have had good days, we have had bad days, and our market performance has gone up. Stick with us, we’re sticking with our plan. We have been making, and we will continue to make minor adjustments in sector allocation, reducing holdings in individual stocks to which we had become over allocated because of positive performance; we have eliminated some individual stocks which weren’t performing as we had hoped, and we have made small allocations to a couple of newcomers which have done quite well. All of this has been in line with our normal practices, very little has been sector-specific beyond our long-term (pre-COVID) strategy, and you shouldn’t read any individual changes to your portfolio as anticipating any specific economic or political outcome. It’s all about the long-term strategy, and that hasn’t changed. Of course, as usual, we would welcome the opportunity to discuss specifics with you as you wish, and certainly if there are any changes in your circumstances you need to keep us abreast of them so that we can make any adjustments that might be appropriate for you personally. Otherwise, steady as she goes. The opinions expressed in this commentary are those of the author and may not necessarily reflect those held by LPL Financial. The material is for informational purposes only. All performance referenced is historical and is no guarantee of future results. The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful. This information is not intended to be investment advice for any individual. You should consult with your personal investment advisor before making any decisions based on this material.