October 6, 2020 Letter to Clients

When I last wrote to you in July, the country was in the middle of reopening the economy. Gradual reopening of state economies has helped many Americans resume some level of normalcy. Educators across the country have risen to the challenge and continue to embrace their critical role of guiding and supporting our youngest citizens. Business owners are adapting to the demands of the consumer by providing safer spaces to workout, safer ways to dine-in and safer ways to shop. And even though “normal” may look different for each of us, we are collectively finding ways to adjust to an ever-changing world.

As we enter the last three months of the year, I would like to review some of the challenges that remain for the markets and economy.

Trade Tensions: Is this the new normal for U.S. and China?

Tensions between the world’s largest economies have been escalating over the past two years beginning with trade and spilling over into technology and finance, and the coronavirus has only magnified these trends. Although the Phase One trade agreement signed earlier this year eased tensions between the U.S. and China in the short-term, the recent tit for tat “unreliable entity” lists have only added pressure to the ongoing trade war and added to the uncertainty for foreign businesses. I expect the economic frictions to intensify over the coming years with ideological differences between the two nations on a range of issues from data security to online censorship. And with many U.S. companies now favoring supply chains closer to home, we could see a lengthy separation of the two nations especially as competition ramps up for technological leadership across areas such as telecommunications equipment, consumer electronics, cloud servers, industrial robots and defense.

Countdown to the Election: How will markets react?

With the passing of Supreme Court Justice Ruth Bader Ginsburg, Congress begins the fight over how and when to replace her seat on the high court. Couple that with the ongoing battle for additional stimulus, and Congress has a lot on its plate this fall. With Election Day just weeks away, the future of both the highest court in the land and the health of the U.S. economy will be at the forefront of many investors’ and voters’ minds.

Historically speaking, markets care less about a blue or red win and more about the green. Investors often worry too much about which party wins an election and place too much importance on election results when in reality, and history tells us, U.S. elections have made essentially no difference when it comes to long-term investment returns. Since Franklin D. Roosevelt (FDR) took office there have been exactly seven Democratic and seven Republican presidents throughout the 22 election cycles. Elections are designed to have clear winners and losers, and often presidents get far too much credit for and far too much blame for the health of the U.S. economy and state of the financial markets.

Although history can be a great teacher, it can be difficult to remember its lessons especially in an election year that has proved uniquely contentious. Just when you thought 2020 couldn’t get anymore chaotic, presidential debates kicked off last month with markets reacting to the candidates’ acrimonious performances. Investors are in for a bumpy ride heading into November as the markets are weary of the next round of presidential debates this month.  

Politics have a way of evoking strong emotions and biases and creating controversies especially around campaign promises. But often, those promises on the campaign trail become diluted realities. After all, campaigning for any office is essentially a marketing process with each candidate presenting themselves as the solution to the issues that divide the nation. This election, like many others, provides a heightened level of uncertainty with an ever-growing list of concerns, especially for the financial markets. And while investors dislike uncertainty, it can create opportunities for those who stay disciplined and reward those who avoid emotion-fueled selling.

It can be tough to know what to tune out and what to tune into especially when we all want to be informed voters without being led astray or distracted by the media noise. None of us can predict the market’s reaction in the short-term, but my experience has taught me that we must contain our emotions especially in times of uncertainty. As your financial advisor, I strive to do my best for our clients’ portfolios during all market conditions and invest intelligently regardless of the market’s reaction to the latest headline.

Interesting to note, since FDR took office stocks have trended higher regardless of the party in office.

Mail-in or In-Person: Will we know the winner on election night? Not likely.

Twenty years ago, Americans awoke to an undecided election after casting their votes for Al Gore and George W. Bush. It would take another 36 days to resolve the contest between the two candidates. That prospect could happen again this year with social distancing requirements and longer than usual queues adding to perennial issues like faulty voting machines and worker shortages. Delays could also arise from the significant increase in mail-in (also called absentee) ballots this year with an estimated 80 million Americans casting their vote by mail, twice as many since the 2016 election and more than any other election year. On the night of the election, media outlets will attempt to “call” a state for a candidate especially if they believe one candidate has an insurmountable lead over the other; however, these will be projections and not a final result. With states having quite a bit of leeway in determining election rules, including the deadlines for a mail-in vote to qualify, it may take days, weeks or even months to count all votes and determine the outcome.

Stimulus Stalemate: Will Americans receive additional aid?

The chances of a robust stimulus package getting through Congress are dimming as we near the next recess; however, many economists and the Federal Reserve argue additional fiscal stimulus is needed to boost the sluggish recovery with many Americans remaining unemployed.

Although multiple proposals have been put before Congress, U.S. lawmakers remain at an impasse on at least the three big spending items: supplemental payments on unemployment insurance, major aid to states and cities and another round of direct payments to Americans.

Unemployment Insurance: While employers added 1.4 million jobs between July and August, the unemployment rate remains elevated at 7.9 percent as of August. The looming question of what comes next remains on many unemployed workers’ minds, with the additional $600 per week boost on top of their regular state unemployment benefits under the CARES Act having expired in July. As a stop-gap measure until Congress comes to a decision on additional aid, the President signed an executive order in August, named the Lost Wages Assistance (LWA) plan, to extend supplemental unemployment relief which provides a $300 weekly benefit for up to six weeks. As of mid-September, at least 22 states of the 49 approved by FEMA, who is overseeing the program, have either started or completed paying the additional benefit. Absent of any Congressional or executive actions, the millions of unemployed Americans will go back to receiving pre-pandemic unemployment benefits once FEMA funds are exhausted.

State and Local Aid: The pandemic-caused economic contraction has created significant uncertainty for state and local governments with tax revenue losses from subdued economic activity having already forced municipal payrolls to shed more than 1 million jobs from March through the end of August according to the Bureau of Labor Statistics. And without federal support, state and local governments will likely have further spending cuts in government employment, education budgets, and other services.

Direct Payments to Americans: Many economists believe the stimulus payments issued under the CARES Act in April helped boost consumer spending in the near-term and arguably kept many American households afloat during the peak of unemployment at the start of the pandemic. It remains unclear whether Washington has the appetite for additional aid or what a second round of direct payments may look like.

Economic Anxiety: What can we expect heading into the end of the year?

With the economic recovery beginning to lose steam as the CARES Act stimulus wears off, all eyes will be on Washington in the coming months. Government money has been largely credited with the rebound in economic activity with many consumers having ramped up spending over the summer as economies reopened and stimulus checks hit their bank accounts. Retail sales, which correspond most closely with the consumer spending component of gross domestic product (GDP), have recovered steadily since May as consumers had more cash to spend. Some retailers have fared better than others, however, as consumers shifted spending from services into tangible goods. Sales in food services and clothing and accessory stores, for example, were nearly 20 percent lower in July than February contrasted against strong growth in sporting goods, hobby, book and music stores which saw double digit increases during the same period.

While third quarter GDP is expected to see a significant rebound, we are likely to see the pace of the recovery slow significantly in the final three months of the year with lower projected holiday sales and stalled talks on additional fiscal stimulus. As we head into the holiday season, which can account for up to 40 percent of annual sales for retailers, businesses are trying to find the right balance between providing a safe shopping experience while enticing consumers to spend.  With the recent announcement from the CDC discouraging Americans from packing into malls or standing in long lines before, on or after Thanksgiving Day, major retailers are also encouraging consumers to start holiday shopping earlier and avoid crowds by extending their Black Friday deals. Some major retailers including Best Buy, Costco and Target among others have even announced they will be closed on turkey day over safety concerns.

But consumers are still hesitant to shop in-person over virus fears. The pandemic has already accelerated the shift to online shopping, and many consumers are more cognizant about making purchases at companies that are well-setup for ecommerce and committed to health, safety, and hygiene. Still, retail sales are projected to see slight growth in the fourth quarter, but sales are unlikely to return to pre-pandemic levels anytime soon.

Public Health Crisis: Living with Uncertainty

Many major states and cities across the country are seeing a spike in new cases, with some expected to hit pause on or even rewind reopening plans. Parts of New York City, the former epicenter of the U.S. COVID crisis, is expected to see re-openings rewound pending approval from the state which will shutter schools, as well as non-essential businesses, and suspend indoor dining for up to a month. The developments in New York come as the nation digests the announcement of a positive diagnosis for President Donald Trump, First Lady Melania Trump and a growing number of high-profile individuals in Washington. The announcement yet again emphasized the gravity of the pandemic and presented yet another wildcard for November with many investors and voters stating the virus poses the number one concern heading into the polls.

In speaking with economists and analysts that we are fortunate at LePage Financial to have access to, many also worry that the recent resurgence in cases could reverse gains seen in the economy over the summer. We are certainly hopeful that Congress will be able to pass additional stimulus to stimulate the economy, but the government will have limited capacity to restore economic activity without addressing the virus first.

New research on the virus offers encouraging data on immunity and vaccine development continues to progress, with Phase III trial data expected to be released in the coming weeks. However, even if we have news of a vaccine by the end of the year or early next year, there will be a massive undertaking requiring coordination between federal agencies, states, pharmacies and healthcare providers, which could pose issues with manufacturing, delivery and availability of the vaccine. Realistically, a vaccine may take 12 to 18 months or longer to develop and test fully in human clinical trials.

Keeping Perspective and Moving Forward

This year has undoubtedly presented an over-abundance of challenges and we continue to face an unprecedented situation, however the ability of people and businesses to adjust to this new normal we are experiencing has been remarkable. While certainly not ideal, I know for my own family that means adapting to three teenagers remote learning at home and for myself it has meant expanding my business practices to accommodate social distancing by using technology.

One thing that remains constant is my continued focus on our client’s needs and with that I recognize that the uncertain climate we are in continues to be unsettling for many. You can be confident that as the financial markets evolve, I will continue to remain informed and actively manage our portfolios in a conscientious manner. It is my role to guide our clients through turbulent times and follow a carefully planned set of guidelines.

The global crisis has inspired many of us to focus on what matters most. It also reminds us of how appreciative we are for those of you in our community who continue to rise to the occasion. I am particularly grateful for our incredible educators this Fall, with my own family reliant on their expertise in this current landscape.

As always, I encourage you to contact our office with questions, concerns or significant life changes as I welcome the opportunity to chat with you. Until we speak again, I wish you good health.

Best Wishes,

Steve LePage


Past performance is no guarantee of future results.