2020 Third Quarter Report & Outlook

My comments are focused on the next three months. I’ve provided links to articles that expand on my views. There is a lot of near-term uncertainty as you, no doubt, appreciate.

In the first quarter of 2020 (if MCS clients’ investments were treated as one large portfolio including their cash), on average clients gained 0.36%1, after fees. For comparison purposes, the S&P 500 Total Return Stock Index (S&P 500) gained 5.57%, and the Barclays Aggregate Bond Index gained 6.79%. The range of MCS individual client returns was from a gain of 6.72% to a loss of 6.45%.

Clients with the lowest returns had their allocation to equities reduced to eliminate further downside risk in the first quarter of this year, so they missed out on the rebound in stock prices in the latter half of the year. Clients with the highest returns had exposure to select technology stocks that did well. Overall, MCS client returns were protected by the defensive posture of their portfolios.

Does the Election Matter?

According to a J.P. Morgan Private Bank analysis, the financial markets appear to be betting on a Blue Wave; Democrats taking the Presidency, House and Senate. President Trump threw a curveball into Stimulus Bill negotiations by suggesting far more stimulus than the Republican position. The markets are concluding significantly more government money will be available (someday) and will support financial asset prices regardless of who wins. Nevertheless, delays in stimulus will undermine stock prices. The likelihood of tax increases to address massive pre-pandemic and pandemic deficits is not currently troubling the markets.


President Trump has been laying the groundwork to contest the election for months.

From a game theory standpoint, it’s an effective strategy. If Trump wins, he gets what he wants. If he loses, he will claim his loss is a result of what he has been warning about. Furthermore, there are going to be some mail in voting problems due to the strain on postal services and some states lack of experience with a mail in vote option. As this local news story from WBKN in Youngstown, Ohio shows, Trump will seize on these problems as ‘I told you so evidence’: https://www.wkbn.com/news/elections/trump-calls-ohios-election-rigged-followingsnafu-with-absentee-ballots/

Mistakes and poor execution are not evidence of voter fraud or election rigging. The FBI, many Republicans, and even his own son see no inherent problem regarding the legitimacy of mail in voting: https://www.npr.org/2020/08/28/906676695/ignoring-fbi-and-fellow-republicans-trump-continuesassault-on-mail-in-voting

Given the President’s rhetoric, many people are concerned about post-election civil unrest. We shall see. The October 26 Wall Street Journal carried the story; ‘Facebook Has Plan in Case of Dire Election Conflict.’ The story discusses Facebook’s strategy to slow / stop distribution of content that may incite violence. (If you’ve been following the Facebook controversy, you know that Facebook is a cause of our country’s divisiveness. The company’s algorithms are designed to keep eyeballs on ads, and they do it by suggesting more and more radical content to viewers based on that viewer’s biases. All your personal data and clicks are monitored and tested to build your digital personality and what you see is curated to get and keep your attention. Facebook effectively reconstructs its user’s sense of reality to sell stuff. Google does the same thing. Watch the documentary, The Social Dilemma, on Netflix.)

Should Trump lose, he will have until January 20, 2021 to hammer away o n social media with his ‘Rigged / Unfair / Stolen Election’ theme, assuming no Supreme Court intervention.

And who knows, the electoral college may produce some surprises of its own. As this Brookings article points out: “This could happen in key states like Pennsylvania, where the governor is a Democrat, but the legislature is controlled by Republicans. Legislatures might claim, for example, a fraud-riven popular vote that renders the state-certified electors unrepresentative of the legitimate popular vote.”


Meanwhile, the economic impact of the not-under-control pandemic remains with us. Excellent strides have been made in treating COVID-19, yet it remains a highly contagious, harmful, and deadly disease for many. While large scale government-imposed lockdowns to thwart the disease are unlikely, targeted hot zone and self-imposed lockdowns will remain until consumers feel safe again.

Investment Strategy

The election may introduce more volatility into markets. If so, I would view it as a buying opportunity. The pandemic has acted as both a disruptor and accelerant of business trends. It’s disrupted any businesses dependent on social gathering. It’s accelerated demand for technology that supports working and shopping from home. Accordingly, it has hastened the demise of brick and mortar retail and disrupted the future demand for commercial office space. It has even called into question the role of high priced, large cities as islands of concentrated economic activity. Housing prices in high urban density cities like New York and San Francisco are under pressure, while suburban and rural housing remains strong.

It appears that one of the biggest post-pandemic changes will be related to where we live and work. Another will be the failure of local businesses that don’t have the financial wherewithal to endure a prolonged loss of revenue. Oil /gasoline demand points significantly lower in a post-pandemic work-from-home world. Through mergers and bankruptcies, the oil and gas industry consolidation has accelerated.

Among the biggest risks investors face are the trillions of dollars created and borrowed to bail us out of this mess and the assumption of near zero interest rates in perpetuity to enable this borrowing. Post-pandemic, these conditions pose a significant threat to stability in the global financial system. Financial assets would suffer large price declines should inflation and or interest rates rise to 2% or more.

Yet, uncertainty creates opportunity. I am identifying real estate related securities that look attractive, offering yield, price appreciation and inflation resistance. These opportunities are in sectors that have been beaten down from, but not recovered to, their pre-pandemic price levels.

As always, if you have questions or would like to discuss changes to your portfolio, please call 800-525-8808 or email michael@mcsfwa.com.

1MCS Family Wealth Advisors (MCS) consolidated client returns are dollar-weighted, net of investment management fees unless stated otherwise, include reinvestment of dividends and capital gains and represent all clients with fully discretionary accounts under management for at least one full month in 2020. Individual client returns represent client discretionary accounts under management for the entire period – starting on 12/31/2019 and ending on 09/30/2020.These accounts represent 97% of MCS’s discretionary fee-paying assets under management as of 09/30/2020 and were invested primarily in US stocks and bonds (11% of client assets on 09/30/2020 were invested in tax-exempt municipal bonds). The Stock Index values are based on the S&P 500 Total Return Index, which measures the large capitalization US equity market. The Bond Index values are based on the Barclays Capital US Aggregate Bond Index, which measures the US investment-grade bond market. Index values are for comparison purposes only. The report is for information purposes only and does not consider the specific investment objective, financial situation, or particular needs of any recipient, nor is it to be construed as an offer to sell or solicit investment management or any other services. Past performance is not indicative of future results.