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State of the Economy and Markets

Quarter 4, 2020

My third quarter update began with a comment about the fantastic summer weather we enjoyed here in the Northeast. A very welcome reprieve from what has been a year we will not soon forget. I would be remiss if I did not mention that as I write this some of us are still digging out from a snowstorm that dumped more snow than we have seen from a single storm in nearly 30 years. Some would say a fitting end to a year that feels like it will never end. I hope that everyone reading this is safe and healthy and that if only for a brief time, you were able to set aside the challenges we have faced this year and spend time with those closest to you and enjoy the holiday season.

Far too many lives have been lost due to COVID-19 and those numbers continue to increase across the nation as we have seen a post-Thanksgiving surge that is likely to continue through the winter. Many businesses, especially those small businesses that are the fabric of our domestic economy, continue to face extreme challenges. We have lost so many of these small businesses already and we are far from knowing what the end-result will look like. The forecasts vary, with some projecting that the economy will return to pre-COVID levels as quickly as second half 2021 while others are looking out toward 2022. The labor market seems to be healing more quickly than expected but unemployment will likely remain elevated for the foreseeable future as well.

Amidst everything pandemic-related, our nation also faced a highly contentious presidential election. Still ahead in January is what is shaping up to be a highly contested run-off election in Georgia to determine control of the Senate. New leadership at the top and a potential shift of power in the Senate creates additional uncertainty as we head into 2021. President-elect Biden has proposed to raise taxes on corporations and individuals. A divided government would likely require compromise and make any large-scale changes to either tax or other policies unlikely in their current form. As far as market returns go, the historical numbers under unified or split governments are very similar and thus no conclusions should be drawn. Each time is unique, and why should we think this time will be any different?

Despite all of the above, as we near the end of the fourth quarter, stock markets have now exceeded their pre-pandemic highs and are on track for returns that will far exceed most expectations following the unprecedented freefall after the onset of COVID-19. After falling 34% beginning mid-February, the S&P 500 has risen 60% from the March lows to current all-time highs. The rally has been fueled by a very resilient and slowly improving domestic economy, optimism about vaccine developments (the first round of which is already underway) and government aid (another COVID-19 relief bill was just passed by Congress ). Also, the Federal Reserve has indicated that it stands ready for more support as needed, likely keeping interest rates at low levels for the foreseeable future.

In addition to the above catalysts, third-quarter corporate earnings have far exceeded consensus expectations, with 85% of S&P 500 companies beating estimates. High levels of cash on corporate balance sheets should continue to allow companies to pay down debt, maintain or increase dividends and repurchase their own shares. High levels of cash remain on the sideline for individual and institutional investors as well. This should also provide fuel to the fire as we head into the latter part of 2021 when hopefully we have been able to put some of the pandemic issues in the rear-view mirror.

As we head into 2021 plenty of headwinds remain for the near-term and we may even see a slowdown in economic growth in the first quarter should the virus continue to worsen before it gets better. While much of the good news may already be priced into stocks and some consolidation might be expected over the coming few months, most think the prospects for 2021 look solid. The delivery of vaccines that leads to controlling the spread of COVID-19, improving corporate earnings, low interest rates and a more mellow political environment will all be necessary to achieve these projections.

Your relationship team is here to meet with you in person, over the telephone or even via video conferencing if you would prefer. We value your relationship and the confidence you have placed in Adirondack Wealth Management by choosing us as your financial partner. We know these are very difficult and trying times and we wish you and your family the very best. Stay positive and stay healthy!


Michael Brodt
Senior Vice President
Wealth Management Director