October Market Update

By Ryan Gilmer, CFA, CMT Chief Investment Officer

November 2, 2020

We hope you are doing well. Here is a recap of market performance for the month of October and year-to-date:

For the month, US small company stocks are positive, while bonds, US large cap stocks, and international stocks declined. The S&P 500 remains the leader for the year so far with regard to stock investments. Of these four asset classes, bonds are currently the best-performing in 2020.

This week, we came across an interesting commentary from Liz Ann Sonders, the Chief Investment Strategist at Charles Schwab, from this article on investor sentiment in the markets.

Perhaps the most descriptive statement ever made about the stock market came from the late-great Sir John Templeton … :“Bull markets are born on pessimism, grow on skepticism, mature on optimism and die on euphoria.” Notice there is not a single reference to economic statistics, earnings growth, interest rates or valuations. The truth in the statement lies in those omissions, in that emotions and behavior are what actually drive markets—even if trends in the economy and earnings help shape those emotions. In fact, as I’ve often noted, investors think of valuation as a “fundamental” indicator in the sense that most valuation metrics—including P/E ratios—have quantifiable components. The reality is that valuation is more of a sentiment indicator than it is a fundamental indicator.

The key point that deserves thoughtful reflection is, “emotions and behavior are what actually drive markets.” Investors use logic and analysis in their decision-making process, but human beings are not always entirely rational. We can be influenced or motivated by emotions like fear, greed, and the need for approval and acceptance. As successful investor Peter Lynch once said, “In the stock market, the most important organ is the stomach. It’s not the brain.” And when emotions like these amp up to extremes, they are expressed everywhere, including financial markets.

As your advisor, we aren’t immune from the emotional ups and downs of markets. Even so, it is always our goal is to help you process and manage your emotions and behavior in order to achieve your financial goals. During times of uncertainty and high levels of volatility like we’ve seen in 2020, this is especially important. We understand that election cycles, pandemics, and other global crises can be a lot to process. However, the future still remains full of hope and opportunity. The truth of every matter tends to live in between the extreme viewpoints and emotions: things are neither as good or as bad as they seem on the surface.

Please reach out to us if you would like to discuss this topic or your accounts in further detail.

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