 Economic Highlights
- The COVID-19 cases showed regional spikes across the country and abroad, sparking worries about the second wave.
- Payroll employment increased at a slower pace, and consumer spending slowed.
- Sales of both new and existing homes, spurred in part by record low interest rates, have exceeded expectations recently and mortgage applications have bounced back.
- The Congress is still discussing more stimulus, but the deal before the elections is unlikely now.
- The 2020 Election highlights a long list of near-term risks to the markets.
 Market Highlights
- US Equities had a turbulent month in September, as expected, but S&P 500 Index managed to recoup some of the losses, closing lower by only -3.8%.
- Foreign equities also gave up some gains, with Developed Markets down by -2.6%, and Emerging Markets lost -1.6%.
- US high-grade bonds lost -0.1%, while high yield lost -1.2%, and foreign bonds ended their bull run, with high grade and high yield posting -1.8% and -2.9% losses, respectively.
- Commodities dropped -3.4%, oil was down -5.7%, and even gold gave up -4.2%.
- US Dollar was the best-performing major asset class this time in the risk-off month, up 1.9%.
 Observations and Expectations
Last month we wrote, “the market head-spinning rally may be coming to an abrupt end“. Indeed, September was the first down month in the markets since March. The sell-off was broad across sectors and asset classes, but it remained orderly and no panic ensued. Yet. In fact, by the end of the month US equities managed to get some of the losses back. Many disconnects remain in the market, valuations often make no sense – on both sides of the spectrum – and the underlying reason remains the huge future uncertainty.
Looking forward to October, the US Election cycle is finally coming to its crescendo. The implications are hard to underestimate for the country, economy and the markets.  Yet, the probability of a hung election due to the disputed results and possibly multiple real violations, combined with highly likely civil unrest appears to be almost completely discounted by today’s markets. And the work to undermine the election’s credibility in public eyes seems to be at full speed by several different forces, which should add more caution to the citizens and investors alike.
Sadly, this is only the top near-term risk. COVID-19 cases are on the rise again, heading into the beginning of a traditional flu season that is expected to be worse than average. The real possibility of a second wave and its effect on the healthcare system, economy and the people’s psyche is another huge risk. The race to a vaccine is ongoing, as is the one to a viable treatment. However, it’s becoming clear that that real stumbling block on the road to the Great Reopening is the absence of a reliable, quick, safe and affordable diagnostic solution. That would allow offices, small businesses, and entertainment and travel venues from theaters to restaurants to sports arenas to hotels and airports – to finally regain some sense of normalcy. The economic reopening plan hangs in the balance, and it depends on the improved pandemic situation as well as the medical solutions. It also depends on additional financial stimulus, which is being held hostage by the forces in Washington. Also, don’t forget the natural disasters such as a series of hurricanes and wildfires and their negative contribution to the economy.
Normally, October is also a key quarterly reporting time for the back-to-school season sales leading up to the biggest retail quarter of the year. Investors would be wise not to lose track of this all-important gauge of corporate health even considering all the risk enumerated above. In 2020, nothing is normal, though, with back-to-school sales becoming a misnomer, and Black Friday officially canceled by major retailers. The earnings have been mixed and corporate guidance largely muted or withdrawn altogether. All points to more reasons for caution. Finally, the highly advertised retail trading activity may exacerbate any significant downside, when margin calls and peer pressure will drive large crowds to the exits at the same time. Even so, certain industries and individual companies remain in advantageous positions, and we do our best to uncover those opportunities to benefit our client portfolios, while also preserving their capital.
 Sector Update
Real Estate has undoubtedly been hit hard by the pandemic. Yet, as we wrote before, some parts of it dealing with infrastructure, data centers, and cell towers have done extremely well. Other parts, including residential and storage, for example, have mostly recovered. Yet, the bulk of the commercial office space and retail remain in danger. As the new normal sets in across large metropolitan areas, many properties may be re-evaluated, and significant investor risks remain.
Consumer Staples may just be the most boring of the 11 S&P sectors. But when the risks are being enumerated, boring is what the investors need. Demand isn’t slowing for food and household items because of all that’s happening in the country. In fact, there are indications that the demand is accelerating again. The second wave worries, combined with likely underproduction in the agriculture this year, lead people to start stacking up for winter earlier this year. This sector of the economy may offer investors an opportunity to stack up as well.
Impact Investing may just be the most boring of the 11 S&P sectors. But when the risks are being enumerated, boring is what the investors need. Demand isn’t slowing for food and household items because of all that’s happening in the country. In fact, there are indications that the demand is accelerating again. The second wave worries, combined with likely underproduction in the agriculture this year, lead people to start stacking up for winter earlier this year. This sector of the economy may offer investors an opportunity to stack up as well.
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the ETFs will lose a tremendous amount of value. What actually happens behind the scenes is that when the ETF price declines below its Net Asset Value (NAV), the authorized participants (read: designated market makers) step in. They buy the ETF shares while simultaneously selling shares of the underlying ETF components, realizing an arbitrage but effectively returning the ETF price back in line with the NAV, its fair value. As a result, the total number of outstanding shares of ETF changes, depending on the direction of the move. This is a critical difference of ETFs compared to stocks (that don’t have any shares created or redeemed on the fly), or closed-end funds (that often trade quite a ways away from NAV), or mutual funds (that only trade once a day at the market close and at NAV). More information about this process and other ETF-related information can be found at our 
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