Quarterly Commentary

November 2020

Equity markets continued to move forward during the third quarter of 2020, approaching pre-COVID-19 highs. Valuations remain high, due in part to accommodative monetary policy, encouraging corporate earnings, and the U.S. economy entering the early cycle recovery phase. Investors were encouraged by positive economic data, including a rise in personal income, consumer spending, and industrial production. The housing sector continued to surge as an increase demand in single-family housing drove prices higher. The unemployment rate continued to drop (from a high of 14% in April to 8% in September), but the pace showed signs of slowing. With a resurgence in COVID cases and the realization that additional fiscal stimulus may not take place before the election, the markets stumbled in September and mid-October. Despite the recent stock market weakness, returns were still strong across the board as the S&P 500’s total return approached 9% for the third quarter and remains positive on a year-to-date basis.

S&P 500 Performance - 3rd Quarter 2020


Most asset classes posted positive returns with emerging markets and domestic large-cap equities the top performers. U.S. growth stocks continue to outperformed value stocks, with the S&P 500 Growth index up almost 12% and the Value Index up 5%. Futures markets priced in higher volatility for the rest of 2020, as election uncertainty over potential drawn-out vote counting and potential legal disputes seem inevitable. 

On a sector basis, sentiment seemed to favor the cyclical sectors over their defensive counterparts. Optimism over-improving labor markets and manufacturing activity led to Consumer Discretionary, Materials and Industrials outperforming Financials, Health Care, and Utilities. Information Technology posted respectable gains for the quarter, despite the selloff at the end of September which could be attributed to profit-taking considering that earnings have remained solid. As has been the case for most of 2020, the Energy sector was the worst performer, ending the quarter down approximately -20%. Gasoline demand stalled in the latter part of the quarter, keeping crude oil prices basically where they began the quarter along with international unrest weighing on the oil market and production.

Sector Performance – 3rd Quarter 2020

Sector Performance

Labor Markets and the Consumer

Currently, the labor market is healthier than at the worst point during the shutdown earlier this year. While almost half of the job losses from the shutdown have been re-couped, the rate of improvement has slowed recently and may continue to be challenging without additional fiscal support to assist in keeping small businesses operating. Consumer spending showed an increase in the third quarter, but there has been a shift in consumption and as one might suspect, the rebound that has taken place has not been even across industries. In fact, over 40% of the reduction in private payrolls has occurred in a single industry: Leisure & Hospitality, which includes restaurants, bars, hotels, sporting venues, museums, and other recreational institutions. With COVID-related activity restrictions, it is not surprising this industry has experienced the lion’s share of job losses. On the other hand, volume in outdoor and adventure travels are up, with sales and rentals of recreational vehicles at record highs. While restaurants are suffering and closing at an alarming rate, consumers have shifted their spending to grocery themed businesses, and customer delivery and pick-up services have never been more robust. Stay-at-home segments have seen a considerable rise in sales, with video/audio streaming services and the technology sector benefiting from increased spending on computers, tablets, software, and other online shopping, not to mention other industries that have prospered from the work-from-home surge. 

Job Losses by Industry

Job Losses

While the shift in consumption and employment explains some of the recent equity and fixed income market dynamics, a rebound in total spending for all those hard-hit industries remains essential to the longer-term health of the economy. The disparity in performance across many industries and individual stocks has at least in part been a result of these changes in spending patterns, and companies experiencing an increase in sales and profits. Combine that with lower interest rates that increase the relative value of future earnings streams, and it is reasonable to assume how these firms have led the equity market higher.

In spite of the unprecedented events of 2020, the equity markets have persevered.

The Election

The final results of the 2020 Presidential election may not officially be known for weeks or potentially months. President-Elect Joe Biden has the 270 electoral votes needed to become the next President of the United States, but with numerous recounts taking place and impending legal challenges, all is far from over. As we talked about in our last communication, Presidential elections draw the most attention, but control of Congress can make more of an impact on policy changes. With control of the Senate still dependent upon two seats in Georgia poised for run-offs not taking place until January 5, 2021, trying to anticipate potential changes in policy remains difficult. With the House dominated by the Democrats, should Republicans maintain control over the Senate, the President-Elect’s success in moving his agenda forward could prove challenging.

At this point, it is uncertain what impact the Congressional elections will have on potential policy changes, but we can assume the country will get fiscal stimulus to some degree. And we do know where President-Elect Biden stands on several issues. If the Senate ends up split down the middle, and the Vice-President-Elect becomes the tiebreaker, issues regarding the pandemic, health care, the environment, immigration, and education, to name a few, would take the country down a different path relative to the past 4 years. While all are important issues, potential changes to tax policy appear to be foremost on the minds of investors. There are too many to be listed here and we always encourage our clients to consult their tax professional should change to existing tax laws come to fruition. Some of the proposed tax changes include:

  • Payroll tax increase on individuals earning $400,000 annually.
  • Top individual tax rate from 37% to 39.6%.
  • Estate tax exemption reduced from the current level.
  • Proposed overhaul in how families transfer assets to heirs (elimination of the step-up in basis for capital gains taxation on asset values).
  • Raising the corporate tax rate to 28%, which is lower than before, but higher than the current rate of 21%.
  • Long term capital gains and qualified dividends taxed at the ordinary income rate (39.6% for income over $1,000,000).

No one likes the possibility of tax increases, but historically, tax hikes do not have a negative impact on equity market performance. There is statistical data which suggests that tax increases tend to coincide with an increase in government spending, which can increase employment, stimulate consumption and in turn, overall economic growth. The wild card in this equation is inflation and whether the stimulus causes wages to rise too quickly, pushing prices higher.

The Federal Reserve has stated that monetary policy remains on hold, that interest rates will remain low for some time, and accommodative policy is intended to support the economy and the flow of credit to households and businesses. The FOMC is expected to target an inflation rate slightly above 2% so that inflation averages 2% over a longer time period, which is higher than the current rate of 1.2% year over year. 

10 Year Treasury Note Yield

10 Year Treasury

The current interest rate environment means that the fixed income portion of portfolios is likely to produce modest returns in the coming years, thus limiting the total return expectations for well-diversified multi-asset and balanced portfolios. Bonds, however, still have an important role in portfolio construction. As we have often stated, the high-quality portfolios we build help mitigate and balance the fluctuation in portfolio values in times of uncertainty and provide the proper balance between risk and return in achieving individual client goals over the long term.


CWM believes in setting longer-term strategies to achieve financial goals but are acutely aware of the angst and concern uncertain and volatile times can cause. 2020 has been an unprecedented year, and challenges will remain after we turn the calendar. Making portfolio moves based on election results has been a risky strategy in the past and could be so again this year with multiple variables hanging in the air about the future of the economy and markets. Longer-term, however, economic activity drives markets, and the focus will be on the COVID-19 vaccine, the pace of distribution, and how that translates to economic growth.

Elizabeth D. Swartz

November 2020


1. S&P 500 - Third Quarter 2020 Standard & Poors 500 Index, Market Cap Weighted Index.

2. Sector Performance – Third Quarter 2020 Morningstar: S&P 500 Sector Index.

3. Job Losses by Industry – Job losses by industry on a year over year basis, stated in thousands, U.S. Bureau of Labor Statistics.

4. 10 Year U.S. Treasury Yield - Federal Reserve Economic Data.


Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Chesapeake Wealth Management), or any non-investment related content, made reference to directly or indirectly in this newsletter, will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this newsletter serves as the receipt of, or as a substitute for, personalized investment advice from Chesapeake Wealth Management. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his or her individual situation, he or she is encouraged to consult with the professional advisor of his or her choosing. Chesapeake Wealth Management is neither a law firm nor a Certified Public Accounting firm and no portion of the newsletter content should be construed as legal or accounting advice. A copy of the Chesapeake Financial Group, Inc.’s current written disclosure statement discussing our advisory services and fees is available upon request.