The third quarter of a rather eventful 2020 saw the stock market’s continued recovery from the March lows earlier in the year. Equities climbed higher, with the broad U.S. indices soaring to new all-time highs before paring back some gains in September. Overall, it was the second consecutive quarter of notable market advances. Both the S&P 500 Index and the Dow Jones Industrial Average rose by high single-digits, erasing the losses of the first half of the year. The technology-rich Nasdaq Composite posted an 11% gain for the quarter, finishing the first nine months of the year up a resounding 25%. The mid and small capitalization benchmarks also gained ground, albeit their year-to-date returns as of the end of September remained in the red.
The economic sector leadership was mixed during the quarter. The previous dominance of large growth stocks was temporarily disrupted by the outperformance of smaller capitalization and more cyclical companies. Consumer discretionary, materials and industrials led the other sectors with double-digit returns for the quarter, while the energy, real estate and financial sectors trailed.
The international equity markets also enjoyed a strong quarter though not as stellar as their U.S. counterparts. The MSCI EAFE Index of the developed countries’ markets was up 4% for the quarter.
While stocks provided investors with a thrill ride, the bond market remained calm and steady. The U.S. Treasury yield curve was virtually unchanged during the second and third quarters, after a dramatic drop in the first quarter. Although the entire curve remains below 1.50%, it also is steeper than it has been in two years. The 10-year Treasury yield ended the quarter at 0.69%, up just three basis points from June. The Barclay’s US Aggregate Bond Index was virtually flat for the last three months and credit spreads continued to tighten.
The U.S. economy has continued to rebound from the pandemic’s initial shock. Real Gross Domestic Product (GDP) decreased by 31% in the second quarter, but while this number is staggering in and of itself, it was widely expected in light of the nationwide shutdown of the economy. However, the pace of U.S. economic recovery increased over the summer and there is little doubt that we will experience a great bounce in Q3 economic output. The Atlanta Fed GDPNow model now estimates 34% GDP growth in the third quarter and the Federal Reserve Chairman Jerome Powell recently noted that “the recovery has progressed more quickly than generally expected”.
Consumer confidence, closely watched due to the importance of consumer spending to the overall economy, showed a big jump in September, reversing two months of decline, as all surveys reflected improved expectations for both the present and the future. Home sales strengthened, driven by low mortgage rates and the pandemic lockdowns, causing many Americans to seek larger, more versatile spaces. With stores and restaurants reopening, retail sales continued to pick up, and retail and auto sales for June, July and August were up from the same period a year earlier. After falling sharply in the second quarter amidst the pandemic, 12-months forward corporate earnings projections stabilized as businesses began to return to regular operations.
The economy has regained half of the 22 million jobs it lost during the March and April lockdowns and the unemployment rate declined to 7.9% from the 15% high recorded in April. It is worth noting that it took only four months for our economy to achieve this goal as opposed to the four years after the financial crisis of 2008.
The Federal Open Market Committee met three times during the quarter, as scheduled, with no change to their overnight rate, which they expect will be near zero until at least 2023. In a meaningful step, the Fed stated that it will now place more emphasis on employment and will not act pre-emptively to head off inflation, allowing “even out” periods of inflation at 2% over time rather than trying to keep it below this level.
The year 2020 has most certainly been a wild ride, and it would not be an exaggeration to say that all of us are ready to put this year behind us and move on. It can be best described as unpredictable, and the pandemic has not only changed the economy, it altered our lives in ways we could have never envisioned just nine months ago. Looking ahead to the last quarter of this extraordinary year, it would appear to follow the suit. Questions surrounding lockdowns and reopenings, a Covid-19 vaccine, additional fiscal stimulus, and economic growth are dwarfed by the event we are about to live through in a few short weeks – the presidential election. All elections are infamously flavored with anticipation and speculation, and this one is no different to say the least. Wall Street largely views a Trump second term as a continuation of business-friendly policies and sees a win for Joe Biden as a higher tax structure and tighter regulations. Markets have their way of handling either one, the only thing that markets do not tolerate well is the lack of certainty. Right now, the markets are climbing because every poll shows a rather decisive win for the Democratic ticket, omitting the uncertainty of a contested election, but we are yet to see how they will react to the actual policies. We all know that promises and proposals made on the campaign trail offer only an indication of a candidate’s intentions, but lobbying, compromise and politics shape the reality once the candidate takes office.
During presidential elections, it can be easy to get caught up in different topics of debate, but political views should not influence financial goals. When investing, it is important to remain focused on your long-term objectives. Stocks are the true independents, and historically U.S. election results have not swayed market outcomes. We are starting the fourth quarter on a relatively high note, which provides our clients a golden opportunity to maintain a long-term balanced approach which will help them comfortably weather any future volatility.
Dumont & Blake Investment Advisors, LLC
September 30, 2020