Executive Summary

The U.S. economy has continued to recover from the depths reached during the COVID-19 shutdowns. The “easy” gains may have been made as we’ve transitioned from shutdowns and stay-at-home orders to resuming many normal activities. However, a complete recovery is unlikely until the pandemic is fully contained. Encouraging news on vaccine progress and treatment options provides hope that 2021 will be a better year.

Asset prices continued to recover during the third quarter of 2020 despite the near-term uncertainty surrounding the election, the timing of a potential phase four stimulus deal, and the recent uptick in COVID-19 cases. Year-to-date returns remain mixed with growth stocks continuing to dominate performance.

The recovery remains fragile and the delay in enacting a phase-four stimulus package adds some risk that additional businesses may falter. Given the uncertain environment, we have positioned portfolios with a moderately conservative posture as we look for attractive entry points to build positions in long-term investment opportunities.

  • Cash – money market balances are being kept at lower-than-normal levels given near-zero yields
  • Equity – slightly underweight due to near-term uncertainties; looking to add on weakness
  • Fixed Income – low rates are unattractive long term, though we are finding value in some credit sectors
  • Complements – adding where appropriate

2020 Election

  • Volatility may increase as the outcome of the election is determined, but it is the shifts in economic fundamentals that will be the ultimate driver of financial market performance.
  • A Biden presidency could mean higher taxes, but also more economic stimulus.
  • The economy and financial markets have proven to be resilient regardless of which party is in the White House or in control of Congress. Politics should not overly influence long-term investment decisions.

Economic Outlook

  • The U.S. economic recovery has made solid progress over the past three months, though it will likely take until the end of 2021 until we reach pre-COVID levels of GDP.
  • The significant amount of stimulus that has been injected into the economy has provided the support needed to keep our economy functioning. A new round of phase-four stimulus measures is being negotiated, which could further aid the most vulnerable parts of the economy.
  • The U.S. Federal Reserve continues to show that it is willing to use all available tools to support growth.

U.S. Equity Outlook

  • Stock market gains were once again led by large-capitalization growth stocks, putting valuation levels for this segment of the market near their highest level in 15 years.
  • Corporate profits have generally been better than expected as companies have found ways to cut costs and adjust to the new COVID-impacted operating environment faster than expected.
  • Valuation levels are currently at above-average levels; historically, this has resulted in below-average returns over the next 5-10 years.

U.S. Fixed Income Outlook

  • Short-term interest rates are expected to remain near zero for the foreseeable future. Historically, the Fed has sought to raise interest rates preemptively when inflation approached its 2% target. A change in policy now allows for inflation to moderately exceed that target before the Fed raises rates.
  • The Fed’s emergency lending facilities have had only modest usage in recent months as credit markets have been well-functioning. With plenty of dry powder left in these facilities, the Fed has the capacity to re-enter markets if needed.
  • Yields on high-quality U.S corporate bonds will likely remain low for the foreseeable future; we are finding pockets of opportunity in higher yielding sectors where we believe investors are being well-compensated for the risk taken.

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This information is for educational and illustrative purposes only and should not be used or construed as financial advice, an offer to sell, a solicitation, an offer to buy or a recommendation for any security. Opinions expressed herein are as of the date of this report and do not necessarily represent the views of Johnson Financial Group and/or its affiliates. Johnson Financial Group and/or its affiliates may issue reports or have opinions that are inconsistent with this report. Johnson Financial Group and/or its affiliates do not warrant the accuracy or completeness of information contained herein. Such information is subject to change without notice and is not intended to influence your investment decisions. Johnson Financial Group and/or its affiliates do not provide legal or tax advice to clients. You should review your particular circumstances with your independent legal and tax advisors. Whether any planned tax result is realized by you depends on the specific facts of your own situation at the time your taxes are prepared. Past performance is no guarantee of future results. All performance data, while deemed obtained from reliable sources, are not guaranteed for accuracy. Not for use as a primary basis of investment decisions. Not to be construed to meet the needs of any particular investor. Asset allocation and diversification do not assure or guarantee better performance and cannot eliminate the risk of investment losses. Certain investments, like real estate, equity investments and fixed income securities, carry a certain degree of risk and may not be suitable for all investors. An investor could lose all or a substantial amount of his or her investment. Johnson Financial Group is the parent company of Johnson Bank, Johnson Wealth Inc. and Johnson Insurance Services LLC. NOT FDIC INSURED * NO BANK GUARANTEE * MAY LOSE VALUE