2020 Third Quarter Market Outlook

The well known, investment saying “Don’t fight the Fed” refers to the Federal Reserve Board (FED) in the United States (US) has been referenced by me in the past.  The reason I keep using the saying is because it is correct most of the time.

Through 2017 and 2018 the FED was steadily raising interest rates which tends to be bad for equities and the fourth quarter stock market sell off in 2018 confirmed the FED’s action.  In 2019 the FED reversed its interest policy and started reducing interest rates which tends to be good for the stock market and gave us strong 2019 and early 2020 equity markets.

The COVID 19 Pandemic in early 2020 was the Black Swan event which caused a sharp sell off in global stock markets.  In the US to counter the sharp economic contraction the US government and the FED became very accommodating pumping fiscal stimulus and liquidity into their economy and bond market.  With the FED lowering short-term interest rates to basically zero and stating a commitment to buy an unlimited amount of corporate bonds put a floor under the bond and stock market.

Most countries globally including Canada, took similar actions but the economic clout of the US makes the FED one of the most powerful central bankers in the world.

The FED’s quick action has helped reassure investors that whatever action was needed the FED was there to provide it and prevent a complete collapse of the US bond and stock market.  This allowed markets to rebound especially the technology sector.

Has the market rebound been too strong based on current economic and pandemic conditions in North America and globally?  No one knows for sure what the bond and stock markets will do over the next 6 to 12 months.  Currently, the trend is up and I expect that to continue in the near future.  As we approach fall and the US election, I expect stock markets to become more volatile.  I will remain quite conservative with my investment strategy as we move towards year end, using market weakness to reposition any equity holdings.

In Summary, I don’t expect another sharp stock market sell off like we had in March of this year, but market volatility will remain high as we adjust to COVID19,  economic and government news.  As always contact me with any questions or comments and please stay safe we will get through this, we always do.