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Third Quarter 2020

I hope this letter finds you and your family healthy. While we’ve made many life adjustments and sacrifices adapting to the new normal; working from home, remote learning, face coverings, and dining outside, COVID-19 remains active across the globe. At the time of this writing, we are seeing spikes in the virus globally with Israel, France, Britain, Spain, and various states in the U.S. showing an increase in cases. However, the medical community appears better equipped to manage the surge of new cases given what has been learned throughout the pandemic. Additionally, pharmaceutical companies around the world continue to work tirelessly to create a vaccine which in our view could not come any sooner.
President Trump announced early Oct. 3 that he, as well as the First Lady tested positive for COVID-19. Several other prominent people associated with his campaign tested positive as well. President Trump was admitted to Walter Reed National Military Medical Center, but details of medical procedures performed are scarce at the time of this writing. This does raise the question, if even the President of the most powerful country in the world is vulnerable, how exposed is the average person? While still early, many believe that in the wake of the President’s diagnosis, there is a growing concern as to whether the President can effectively execute his duties while battling the effects of COVID-19.
The U.S. and emerging equity markets had strong double digit returns from the start of July through the end of August. However, within the U.S. equity market we witnessed a narrowing of market breadth or a smaller of number of companies that make up more of the S&P 500’s positive return. This historically doesn’t provide much support for a long-lasting bull market. In addition, interest rates have remained at historic low levels. When September emerged, the U.S. market started to correct. While several events could be attributed to the cause of the correction, we believe expectations around another stimulus were reigned in. Expectations about timing and size of a stimulus were reduced due to the recent improvement in economic data. The data was by no means great, but seeing some modest improvement around unemployment, manufacturing, and housing has been influencing the size and timing of another round of stimulus. Also, with the passing of Justice Ruth Bader Ginsburg, more uncertainty has been created as a Supreme Court nominee battle is surely on the plate of Congress which may impact finding any common ground on future stimulus. While the near-term outlook is cloudy, we hope that the completion of the U.S. election will provide some visibility to the market.
This brings us to the U.S. election. It appears that the weeks prior to this election could be the most volatile period for the markets leading up to an election that we’ve witnessed in recent memory. We believe the market needs a clear landslide victory for one candidate in order to provide the market with some clarity on the future direction of the U.S. government and the economy. Mail-in voting due to the pandemic could delay declaring a winner on the night of an election. Depending on how tight the race is, we could see a projected winner on election night, only to have the winner change to the other candidate a few days later after mail-in votes are tallied. The last thing the market needs is a disputed election that makes Florida’s 2000 “hanging chad” look like a walk in the park.
While many things are unsure, we feel somewhat confident that low interest rates are here stay for the immediate future. The Federal Reserve has implied that they are willing to withstand inflation rates higher than previously announced targets. While extreme inflation is a risk, we’ve had not encountered much inflation even as rates have fallen over the years.
As we look forward through year end, we believe we will experience a heightened level of volatility. Between the U.S. elections, potential stimulus, low interest rates, and a potential vaccine the markets will have plenty to react to. We believe we have constructed our in-house asset allocation portfolios to weather the upcoming volatility. In the face of the pandemic there are a few stocks in our focus list that are performing well: Apple, Union Pacific, and Berkshire Hathaway all of which have posted strong double-digit returns during the third quarter. Investor optimism for Apple’s new iPhone launch this fall attributed to the strong performance. Union Pacific benefited from better pricing and higher restocking activity coupled with better cost management. Berkshire Hathaway performed well during the quarter in part because of an announced stock buyback program. Our holdings in the AQR Large Cap Defensive Style Fund performed well during the quarter, attributable to strong returns in consumer staples sector, as it kept pace with the S&P 500 while maintaining its more defensive characteristics.
As we enter the final quarter of the year, I think it’s important to look backwards to remind ourselves of what we’ve overcome to get to this point- the shutdown of the economy, stay at home orders, closing of schools and the high level of hospital utilization. It has proven how resilient we can be and how rapidly we can adjust to change. If there has been a sizable change in your life or business due to the pandemic, please reach out to us in order to make sure you are in the correct asset allocation portfolio.

Phil McManus
Chief Investment Officer
Wealth Management at Century Bank logo.
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