We are three quarters into 2020, and the experience thus far has been akin to riding a pendulum, swinging from insurmountable obstacles on the road to imminent disaster to a world full of positive change, hope, and possibility.
The first quarter of the year saw a health crisis morph into an economic crisis. In the second quarter markets staged a remarkable recovery at a historic scale and pace. The third quarter gave us a bit of both.
Over the course of July and August global markets continued to post solidly positive returns, buoyed by optimism on the pace of economic recovery, optimism on winning the battle against COVID-19, and optimistic expectations for ongoing stimulus. Unfortunately, all three of these issues were impacted by disappointing developments in September, and markets reversed course.
Despite a slump in September, US markets managed to end the quarter in positive territory. At quarter end, the S&P 500 finished up +8.93%, driving it to a +5.57% year to date. The Dow Jones Industrial Average was up +8.22% for the quarter, though still down -0.91% year to date, while the NASDAQ Composite finished the quarter up +11.24%, powering it to a +25.33% return year to date. Large cap growth companies, in particular big technology stocks, have continued to dominate, while small cap stocks have struggled to keep pace. The MSCI USA Small Cap Index, while up +5.60% for the quarter, is still down year to date -7.76%.1
International Developed and Emerging Markets participated in a similar fashion, albeit to a
lesser degree, with the MSCI EAFE and MSCI Emerging Markets indexes posting positive returns for the quarter of +4.88% and +9.70%, though are still down -6.73% and -0.91% respectively for the year to date.2
In fixed income markets, performance was mostly positive across the board, and the broader
fixed income indices managed positive results for the quarter with the Bloomberg Barclays US Aggregate Bond Index finishing the quarter +0.62%, and +6.79% year to date, while the Bloomberg Barclays Global Aggregate (Hedged) Index finished the quarter +0.73%, and +4.65% year to date.3
For the quarter, Factor indices across the board posted gains, with (familiarly enough) Momentum and Quality in the lead. In the US, during the month of September, the heretofore strongly performing big tech names struggled, helping Value and Small Caps make a resurgence in relative performance.4
As mentioned, Q3 saw markets impacted by both hope and disappointment on several key fronts:
While expectations that the economic recovery would continue unimpeded, the data has pointed to a slowdown—including the loss of momentum in monthly job growth5 and a reversal of the data across the ten daily and weekly indicators of real economic activity which make up the
New York Fed’s “Weekly Economic Index” (WEI)6. This suggests the economy’s return to its pre- pandemic strength is unlikely any time soon.With the decline of the infection rate in late summer, perceptions abounded that the worst of the pandemic was behind us, and a vaccine was close at hand. Though the pace of development for treatments and possible vaccines has indeed been exceptional, the process has fallen under the suspicion of becoming politicized, while in September COVID-19 infections rose sharply across the US, and in countries around the world, prompting speculation of a possible “second wave.”7
Recovery across markets has reflected the expectations of ongoing massive fiscal and monetary stimulus. Market participants had every expectation of another round of stimulus after the expiration of the CARES Act on July 31. Negotiations have been bogged down by politicalwrangling in Washington, and hopes have faded for any action on stimulus this year.8 Meanwhile, the Fed has continued to provide unprecedented levels of support in the form of rolling back interest rates to zero, providing markets with $3 trillion in liquidity, as well as promises of unlimited asset purchases, including buying corporate bonds with ratings as low as “junk.” However, speculation that the Fed is now “pushing on a string,” coupled with the rollout of a new monetary policy strategy (Average Inflation Targeting), which has been anything but smooth, has stoked fears that the Fed may have run out of “bang” when it comes to stimulus.9
Markets have shifted focus to the potential impact of the US election in early November, particularly where the candidates stand regarding policies for: taxation, trade, big tech monopoly, immigration, foreign relations (particularly China), crime and policing. While this is a normalprocess that markets digest and react to, this election cycle has seen more polarizing rhetoric
than most, and the specter of a disputed election result has prompted fears of unusually high market volatility. Over the short run, the impact of elections on markets can be among the most volatile and unpredictable time periods. A prolonged period of electoral uncertainty (akin to what we experienced in 2000), can extend that volatility. However, history has shown that upon the conclusion and settlement of the election results, markets adjust to reflect the news and move on. Data shows, on average, that the outcome of the election will likely have a little effect on long-term returns. If you are investing for the long run, we believe the best way to handle an election and avoid sustaining a potentially large loss, is to avoid making emotional decisions based on the daily headlines, and hold your course.
1 Morningstar Direct, as of Oct 1, 2020
2 Morningstar Direct, as of Oct 1, 2020
3 Morningstar Direct, as of Oct 1, 2020
4 S&P Dow Jones Indices – Index Dashboard: Factors as of Sept 30, 2020
5 Cox, J. “Jobs report shows fewer hires as recovery loses momentum”, CNBC Oct 2, 2020
6 Federal Reserve Bank of New York Weekly Economic Index (WEI) as of Oct 3, 2020
7 New York Times Covid World Map: Tracking the Global Outbreak as of Oct 1, 2020
8 Duehren, A. “House Passes $2.2 Trillion Coronavirus Relief Bill in Absence of Bipartisan Deal”, WSJ Oct 1, 2020 9 Rabouin, D. “Jerome Powell, Trump’s reelection MVP”, Axios Markets, Sept 29, 2020
MARKET COMMENTARY: Q3 2020 DISCLOSURE
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