We feel we should be clear: there is volatility to be worried about. An article on “accounting for survivorship”[1] sought to explain the survivorship bias in looking at US international dominance when measuring “country-specific real equity market returns” from 1900 to 2019. As the Morningstar article points out, in 1900 the United Kingdom dominated the world equity market with a 25% share, while Germany, France and the United States held roughly 15% shares each. As we pointed out last quarter (see QMP Summer 2020), by 2020 the United States accounted for almost 55% of the world equity market itself. The authors of the article rightly point out that for equity markets in Germany, Russia and Japan, “being on the losing side of a world war or two, the overthrowing of capitalism or just prolonged poor market performance would have wiped out the capital investors.” Certainly.

US equity markets had a good third quarter (+8.9%) despite a rough (-3.8%) month of September. July and August were strong, driven primarily by the notion that much of our economy can function even with part of it disabled by a pandemic. Many of the same stocks that drove the market in April, May and June continued their strong performance, though the highest flyers suffered more in September. Volatility was up in September, with 17 of the 21 trading days showing a spread between the daily high and low of greater than 1%; two of those days had a spread in excess of 3 percent.

Will the Tax Bite Ease?

The day-to-day quest to lower the bite of taxes continues. Examination rates for the IRS now defy logic. For all individual returns the examination rate for tax year 2018 was 0.15 percent.[1]  For income over $100,000, progressing by categories to income over $10 million, the examination rate varied from 0.05% to 0.03% annually. This is where the money is. For incomes of zero, yes, that’s right, zero, the examination rate was 0.31 percent. Fraud, particularly regarding the earned income tax credit (EITC), causes the focus. Using the tax code for social engineering rather than collecting money does skew the system. Some other things require attention, but don’t get it.

Sometimes investment professionals offer this rather generic description of how they work: “we’re not market timers.” The kernel of truth is that it is very hard to make two good decisions regarding first, when to get out of the market and then second, when to get back in. Some stocks in the growth category are secular growth stocks, where “innovation can carry companies to growth almost independently of the economic or business cycle.”[1] On the other hand, value stocks, besides needing those two above-mentioned good decisions, “need an economic outlook conceptual framework over a multi-year forward time period to begin positing economic growth.”[2]

Sometimes investment professionals offer this rather generic description of how they work: “we’re not market timers.” The kernel of truth is that it is very hard to make two good decisions regarding first, when to get out of the market and then second, when to get back in. Some stocks in the growth category are secular growth stocks, where “innovation can carry companies to growth almost independently of the economic or business cycle.”[1] On the other hand, value stocks, besides needing those two above-mentioned good decisions, “need an economic outlook conceptual framework over a multi-year forward time period to begin positing economic growth.”[2]

The S&P 500 Index performed a most spectacular “V” in the first half of 2020, first falling 33.9% through its March 23rd low, then rallying 38.6% through mid-year. This performance included the steepest plunge and the fastest rally in 90 years.[1] The wild ride left the market still down 8.4% from its February all-time high and down 4% from the beginning of the year. The index returned 20% in the second quarter. Stocks rallied, anticipating a treatment for COVID-19 and an economic recovery turbocharged by both fiscal and monetary stimulus.