I recently participated in the first-ever virtual March for the Fallen, an event honoring armed service members who have sacrificed their lives in combat for our freedoms and the Gold Star families that keep their memories alive. Knowing I would be facing a long, challenging Boston course, I began training several months ago. I planned to run as much of the route as could. My strategy was to identify landmarks to reach on the course, where I would then evaluate my stamina and pain to see how much further I would run. My mantra was, “Just get to XYZ point.” For me, it was a course comprised of five-mile increments.
I ultimately ran 27 out of the 31 miles—a personal best—and surprised myself along the way. While I was on the course, trying to get to my next checkpoint, the process of running that long distance felt much like trying to navigate this market.
At one point, I was starting to fade and knew I was two miles from my mile 14 checkpoint, where I planned to stop for a quick walk. Right then, a perfect song came on my playlist, giving me enough of a boost that I ran my third fastest mile split—right as I was about to enter the pit of despair and give up.
In terms of the market, my endorphin-pumping adrenaline shot of music was much like the Federal Reserve and Congress pumping trillions into the system at the onset of the pandemic, seeking to offset the pain the economy was feeling as a result of the humanitarian crisis and shutdowns. Like the stimulus, my music didn’t get rid of the pain but only masked it.
Later, I faced a water crisis: The course didn’t feature any fancy water tables with Gatorade or pickle juice. It was “BYOW” and I brought one less water than I needed. This is no different than the market no longer having access to fresh fiscal stimulus. The market is now paying the price of not being able to hit up the water table and grab a cup of fresh stimulus—and it still has some distance to cover before the pandemic is over. It needs one more round than it has been given, one of the reasons why the market became more volatile in September.
The course featured a few hills, which can break a runner’s spirit. The best way to get past hills is to train for them. Same with market volatility, to a degree. In this scenario, training equals diversification. Since 1979, the standard sixty-forty portfolio of S&P 500® Index stocks and aggregate core bonds provided 91% of the return of stocks but with 64% less volatility and 36% lesser max drawdowns.1 In 2020, the sixty-forty portfolio has earned more than 100% of stocks returns with 40% less volatility.2
Asset class ETF flows: Fixed income, gold funds still running hard
Despite the market volatility, equity ETFs still took in $20 billion in September, upping their year-to-date total to more than $100 billion and pushing total assets past $3.5 trillion. Fixed income ETFs continued their record-setting pace, adding $13 billion in September to bring the 2020 year-to-date figure within $600 million of the 2019 annual record.
The equity flows reflect modest positioning within some of the more tactical market tools, as one might expect with such a volatile market and the ability to leverage the flexibility of the ETF structure to go either long, short, or obtain exposures through derivatives. Because of these investor use cases and the record-setting figures for trading volume, short interest and ETF options volumes, I recently proclaimed 2020 as the best year ever for ETFs—even if overall industry flow totals don’t break records.
Flows into commodity funds continue to shine, led by precious metal exposures, such as gold. In fact, with gold funds taking in more than $2 billion, September marks the ninth consecutive month with flows greater than $1 billion and the eighth month in a row of flows greater than $2 billion—all record figures and the reason why the $34 billion haul in 2020 is also an annual record.
Gold flows have been persistently strong in 2020, given the high risk/low real rate regime fueled by the global pandemic. With no likely abatement in macro risk flashpoints—thanks to the US election and the under-the-radar kerfuffle that is still Brexit—demand for defensive, risk-off assets like gold may persist. As a result, the probability of having more than $1 billion of flows every month in 2020 is within the realm of possibility.