Coming off one the strongest quarters on record, the third quarter of 2020 saw the domestic equity market move higher once again. While the market did pull back a bit in September after five consecutive months of gains amid concerns about stretched equity valuations and trepidation over the upcoming presidential election, the S&P 500 Index still returned a very healthy 8.93% through quarter’s end. The consumer discretionary and basic materials sectors were the quarter’s top contributors, and large-cap names generally outpaced their mid- and small-cap peers. The growing bifurcation between growth and value continued to play out in the quarter, with growth stocks faring substantially better than their value counterparts across all market caps.
On the international front, both developed and emerging market equities rose in the third quarter, albeit to a slightly lesser degree than the prior quarter. As numerous countries still face restrictive measures resulting from COVID-19, supply chain disruptions have stunted the production of goods and services and the demand for many products continues to be subdued. Emerging markets, specifically China, tended to fare better than their developed market counterparts in the quarter. Better-than-expected export growth, a buoyant economic outlook, and relatively successful containment measures of the virus helped propel Chinese equities higher. As a result, the MSCI Emerging Market Index returned 9.65% versus a 4.88% gain in the developed market composite.
The Federal Reserve kept its discount rate unchanged at zero percent through the third quarter and stated that it does not expect to raise rates until the end of 2023. This accommodative stance appears to have had some success in reinforcing the stability of the fixed income market, with the U.S. 10-Year Treasury Note finishing the quarter yielding 0.69%, essentially unchanged from the 0.66% yield at the end of the second quarter. The relatively recent introduction of a corporate bond purchase program aimed at quelling pandemic-induced economic uncertainty continued to benefit the corporate bond market, and both investment-grade and high-yield corporate bonds posted positive returns. While municipal bonds continued to lag their corporate counterparts, they did outperform government issues.
Outlook: As we cross roughly the six-month mark since the depths of the coronavirus pandemic sell-off, much can be said about the resilience that financial markets have shown, and today many regions have rebounded back to near all-time highs. Thus, the question then becomes: what does the future have in store?
While no one has a magic crystal ball, it is likely that the future path of the virus, vaccine development, further stimulus measures, and labor market recovery – all of which have generally begun to trend in the right direction – will continue to be key drivers. As of right now, social distancing measures coupled with increased testing capacity have made some increase in economic activity possible without a meaningful impact on the spread of the virus. Additionally, nine potential vaccines have been cleared for latter-stage clinical trials, including those from companies such as AstraZeneca, Moderna, and Pfizer. A further ramp-up in testing, and especially a potential vaccine, would boost consumer confidence and help businesses return to normal operating activity and would be a clear positive for markets.
Independent of vaccine development, pockets of the economy have shown signs of improvement. A rebound in U.S. manufacturing continues to be underway as travel and leisure spending lost during the pandemic has at least partially been re-directed towards the purchase of goods, largely via e-commerce. Housing and autos have also rebounded strongly, benefitting from lower interest rates and pent-up demand. With the Federal Reserve expected to keep interest rates on hold for the foreseeable future, money remains cheap and these sectors may continue to benefit. Looking at the economy more broadly, proactive stimulus measures geared toward businesses have aided in the labor market recovery. Roughly half of the 21 million jobs lost during March and April have since been recovered, and any further fiscal stimulus to households would provide another level of support for those still unemployed.
Finally, as we move into the fourth quarter, top of mind among investors is the upcoming presidential election. If history provides any indication of the future, election results provide very minimal predictive power on future portfolio performance. Keep in mind that the one known going into this election is that there are a finite range of possible outcomes between the Presidency, House, and Senate, and, as such, no combination of outcomes will be completely unexpected by the market. This is especially true since no specific outcome is the obvious favorite. This contrasts with the last presidential election, where Hillary Clinton was the expected winner. The surprise news of her loss sent markets lower the night of the election, but markets quickly recovered, ended positive the following day and have had a strong run since. That said, while volatility should be expected around the election, especially an election as fraught as this one, it does not change the recommended approach to each of our client’s portfolios.
During times like these, we are often reminded of the quote by the late Ben Graham – “The individual investor should act consistently as an investor and not as a speculator.” When one tries to assume the role of a speculator, more often than not, they are adversely affected. It is important to look past these inherently unpredictable short-term events and instead remain focused, as an investor, on your long-term goals and objectives. As always, we at Condor strive to work alongside each and every one of you to produce strategies that are best aligned with your long-term needs, and we thank you for your continued trust.