To say that 2020 has been a unique year is an understatement. In fact, I have heard that hindsight no longer wants to be associated with 2020. Surprisingly, the markets and economy have been resilient through all this.
During the third quarter of 2020, despite the myriad negative headlines the S&P 500 index reached all-time highs at the beginning of September. The ﬁxed income markets remained fairly stable over the quarter as the Fed continues to provide support.
The third quarter of 2020 was positive across the board for markets. The S&P 500 returned 8.93% in the quarter and the MSCI EAFE (foreign stock index) managed to return 4.80%. Foreign stocks have struggled since March and the third quarter recovery was welcome. The Bloomberg Barclays US aggregate bond index returned 0.62% as interest rates remained historically low and inﬂation virtually nonexistent. October was a challenging month for investors as equity markets across the board declined (except for US small caps which gained just over 2%) and volatility increased due to uncertainty about the three most important market factors this year: elections, stimulus, and virus.
It is often said, the market climbs a wall of worry. This held true in the third quarter. Investors expected an additional ﬁscal stimulus of around $1.5 trillion at the beginning of August. We are now in the beginning of November and no stimulus has emerged, yet the markets are trading at historically high levels. A second wave of infections spread across the US and focused lockdowns were implemented, yet the markets are trading at historically high levels. The markets are forward-looking, and they see a twelve to eighteen-month future that looks diﬀerent than today.
The pandemic-imposed lockdowns drove the global economy into recession. In the US, second quarter GDP declined at an annualized rate of nearly 40%. Unemployment sky-rocketed from historically low levels to over 16% and more than twenty-two million jobs were lost. Economically, the third quarter was the inverse. The US GDP grew 7.4%, which equates to a 33.1% annualized rate. This was the highest quarterly growth rate in more than ﬁfty years. Since April, the economy has recovered just over twelve million jobs and the unemployment rate declined to 6.9%. In October, the economic recovery continued as just shy of six-hundred thousand jobs were added and new unemployment ﬁlers declined to the lowest rates since April. Both the manufacturing and service sectors have been in expansionary territory the past four months.
The performance disparity between market sectors continues. The information technology and consumer discretionary sectors have beneﬁted from the lockdowns, while energy (down more than 50% year-to-date) and ﬁnancials have struggled. The housing sector has remained strong as low interest rates have led to record levels of reﬁnancing and continued strength in new home purchases. The travel, leisure and hospitality sectors pummeled in the second quarter have begun to experience growth as lockdowns have eased.
Elections can induce unwanted uncertainty and volatility. Presidential candidates present varied spending, trade, and tax plans, which can potentially aﬀect the growth of the economy. The markets rallied substantially after the election as the likelihood of an expected “Blue Wave” decreased. This means the potential for proposed tax increases and regulations declined and a softer stance on trade is a near certainty. A divided government implies it will be diﬃcult to change the status quo, this makes investors forward-looking projections less uncertain.
As long-term investors, it is vital we remain conscious of the factors that impact long-term investing. The factors that inﬂuence short-term investors and speculators are typically muted over the long-term. It is important you remain aware of these nuances and stay focused. When short-term factors are applied to long-term investing the outcomes may not be optimal.
If you have questions about your account, or whether you are focused on the right factors, please contact your Regency Advisor.