Third Quarter 2020 Market and Economic Review
The third quarter of 2020 marked another impressive quarter of returns for most asset classes after the severe pullback during Q1. Even with these positive returns, however, the common trend that most asset classes are negative for the year remains. As investors stay apprehensive about the uncertainty of the upcoming Presidential election and timing of a COVID-19 vaccine, high levels of volatility were constant throughout the quarter and are expected to continue through the end of the year.
U.S. large companies, as measured by the S&P 500, rose 8.9% over the course of the quarter which brought the year-to-date returns back into the positive. One of the biggest driving factors has been the exceptional returns of tech stocks on the NASDAQ-100 which was up 12.6% quarter-to-date and 31.6% YTD. Though the S&P 500 contains 500 individual companies across all industries, it is skewed heavily towards tech with the top 6 companies (all tech) making up over 22% of the index. The equal-weighted S&P 500, which normalizes this skew to tech, was up 6.7% during the quarter but is still -4.7% on the year indicating that many large companies are still recovering.
The Russell 2000, which tracks the performance of U.S. small companies, posted positive returns as well with 4.9% during Q3 but remains negative year-to-date at -8.6%. Though government stimulus packages initially helped steady the impact of COVID lock-down, many smaller companies are still in need of aid. Unfortunately, multiple deals between the Democrat and Republican parties stalled at various points throughout the quarter, prolonging the recovery of smaller companies.
The MSCI EAFE, which follows the returns of 21 developed nations, followed the trend of having strong quarterly returns of 4.8% but is still down for the year at -7.1%. With various degrees of COVID restrictions globally, many countries have struggled not only with the production of goods and services but also with lower than usual demand from their respective consumers.
The bond market continues to be one of the best performing asset classes YTD as the Fed continues to help support the bond market through quantitative easing. The Bloomberg Barclay’s U.S. Aggregate Bond Index posted a positive 0.62% for the quarter and has gained 6.8% on the year. As more conservative investors choose to move away from the volatility of the stock market, the demand for bonds has driven the price up despite lower interest rates. The 10-year treasury remained relatively even throughout the quarter starting at 1.46% and ending at 1.42%.
* Each benchmark is allocated based on the assumed Risk Profile of underlying indexes.
**Benchmarks include a mixture of ICE BofAML U.S. 3-month Treasury Bill Index, Barclays Global Aggregate Bond Index, Barclays U.S. Aggregate Bond Index, Bloomberg Barclays Multiverse, Bloomberg Barclays Global High Yield, Bloomberg Barclays U.S. Credit, MSCI EAFE Index, and the Value Line Composite Index (Geometric). These benchmarks are the same as those in the Risk/Return and Account Analytics sections of client quarterly performance reports. By comparing your portfolio’s return to the benchmark with the closest risk/return characteristics, you get a more accurate reading of portfolio performance than using a less diversified benchmark, such as the S&P 500 index.
Jerome Powell, the chairman of the Federal Reserve, stated he felt that the U.S. economy could soon face significant headwinds, especially as more time passes without fiscal stimulus. If the markets are always forward-looking some have questioned then, ‘Does Wall Street line up with what is happening on Main Street’? While major indexes - which receive the most media attention - like the S&P 500 and the NASDAQ-100, might lead you to believe that the market is outpacing the economy, this is only part of the story. However, outside of tech stocks, Wall Street has not returned to pre-pandemic levels. Likewise, outside of minor exceptions, Main Street has yet to recover, but progress is being made.
The U.S. housing market is one of the few areas that has surpassed levels prior to the pandemic with newly built home sales showing the highest numbers in 14 years and existing homes sales also returning to pre-crisis levels. This is largely due to the Fed cutting the Federal Funds Rate to 0.25% and stating in September that rates are unlikely to rise for several years until the economy as a whole has recovered.
Unemployment and GDP are two more areas that have shown improvement but are still well below pre-COVID levels. After U.S. unemployment reached an all-time high of 14.4% in April, the numbers have steadily been improving as lock-down restrictions have eased and demand for workers has increased. The most recent update through September shows an unemployment rate of 7.9%, higher than the pre-COVID rate of 4% but progress, nonetheless. With the gradual increase in consumer spending that often accompanies employees going back to work, GDP also started trending upward but is still well below historic norms.
International economies have faced many of the same issues as the U.S. but over the past few months, several countries have been hit with harsher second waves of the virus causing progress to slow. Although not as restrictive as the first wave, this has forced many governments to re-implement various degrees of lockdown measures. In the Eurozone, the prolonged weakened economy along with a sudden influx to the money supply has caused inflation to turn into deflation for the first time in four years.
As we enter Q4, several major unknowns raise concerns, such as: Will we get a vaccine? Will we get a stimulus package and what will it look like? Who will win the election? Will the results of the election be accepted right away? How will the UK’s rapidly approaching Brexit decision affect international markets? For better or worse, the answers to these questions will have an impact on the economy. We want to reassure all of our clients that each of these indicators is on the top of our minds, too. As always, we will take every step necessary to put you and your family in the best position to reach your goals no matter the outcome of those questions.
As always, please reach out to us with any questions or concerns you may have, and we wish you, your family, and your loved ones the best for the upcoming holidays.