October 2020 Monthly Review
Early Reactions to November Election
October was primarily driven by position posturing into the highly contested US presidential election. Despite a positive earnings season (with many companies exceeding expectations), stock prices were modestly negative in October (S&P 500 Index -2.66%). The last week of October, the week just before the election saw the sharpest decline for stocks since March.
The drop in equity markets did not create the usual “flight to quality” into US government bonds. The bond market also fell in October, as interest rates rose from extremely low levels and buyers became more cautious before Election Day. The US 10 Year Treasury Note rose by 19 basis points during the month, the highest monthly increase in over 2 years.
As Tuesday, November 3rd arrived, the election came, but did not leave. We all witnessed another very close election with a distinctly divided nation. Joe Biden was projected on Saturday, September 7th to become the nation’s next President, while the Trump campaign has been filing lawsuits in battleground states where the race has been close. As of Monday, November 9th, the Senate race remains uncalled.
Both bond and stock markets rejoiced for 4 days surrounding the election. Post-election day, with no clear winner, bonds yields fell and stocks surged likely due to a few reasons:
- The election was finally “over”!
- Rates would remain locked close to zero by the FOMC.
- A federal government seemingly set up with new checks and balances between Congress and the President, could create the possibility of a long-term “risk-on” environment as “animal spirits” return.
Economic growth and employment uncertainty remain as we witness rising cases of Covid-19 and fears of further surges as colder weather sets in, balanced with slow, steady progress from pharmaceutical companies.
Piton is maintaining its focus on quality portfolio construction while maintaining conservative duration. While interest rates hoover around historic levels and absolute yields on municipal bonds and high-grade corporate bonds remain low, it is clear the “easy lifting” in bond performance may be done for 2020.
It seems that there are a fair number of reasons to become negative on the bond market with the election “almost” behind us. We are positioned for this and look to add alpha to portfolio returns if economic reflation comes to fruition. Still, FOMC vigilance, future tax consequences, and “unknowns” around Covid-19 and global economic repercussions, give us confidence holding a “corner-stone” fixed income portfolio allocation is very logical for the foreseeable future.
Please reach out to us at 646-518-2800 to review your current portfolio, the current bond market environment or to receive additional detail on how Piton can help meet your needs.