The Quarter in Review | 3Q 2020
While many of us might desire to close the book on 2020 right now for a number of reasons, there’s still much to be figured out in the final quarter of the year – and beyond – that will have an impact for months to come. As of this writing there is still uncertainty about the country’s political transition and which party will take control of the Senate. There is rising concern about COVID-19 as the weather turns cold and a lack of clarity on vaccine implementation for 2021. Everything political and health related is going to cause some level of market reactions. These aren’t new issues – they are just coming to a head. Here’s how the markets performed in the third quarter amid this uncertainty.
THIRD QUARTER RETURNS. U.S. markets were up approximately +9.21 percent for the quarter, having fully recovered from market lows reached in late March.
International Developed and Emerging Markets continued recoveries, up +4.92 and +9.56 percent respectively. Developed markets had positive returns in 20 of 23 countries. Emerging Market country returns were more mixed with 15 positive for the quarter and 11 negative.
A globally diversified portfolio of 50/50 equities and fixed income was up 4.15 percent for the quarter and 1.71 percent year to date.
FIXED INCOME. The Federal Reserve (Fed) communicated they plan to keep interest rates low through 2024, an unusual move outline and expectation so far in advance. With this announcement, rates held steady in the range of 0 percent - 0.25 percent.
In terms of total returns, inflation expectations began to increase based on the unprecedented fiscal stimulus put forth. Inflation Protected Treasuries (TIPS) returned +3.03 percent for the quarter; intermediate corporates +1.33 percent, and intermediate-term municipal +1.40 percent. The broad aggregate bond index was modestly up +0.62 percent for the quarter and +6.79 percent year-to-date.
ALTERNATIVE INVESTMENTS. Real Estate Investment Trusts (REITs) continued to struggle, the U.S. REIT index is still down -22 percent on a year to date basis as expectations for delinquencies and outright defaults continues to increase. With demand picking back up, the Bloomberg Commodity Index experienced a strong quarter, up 9.07 percent for the period, but still remained down -12.08 percent year-to-date.
SUMMARY / LOOKING FORWARD
While President-elect Biden and the Democrats have secured the White House, what is still outstanding and equally important to potential policy changes is control over the Senate. Currently, the Republicans hold 50 seats and the Democrats hold 48. Two Georgia seats are to be decided in a run-off in January. If the Republicans maintain control of the Senate by winning at least one of the Georgia seats, both parties will be forced to work together and some of the tax and legislative priorities of a Biden presidency will be negotiated. History has shown us that markets tend to like a split party scenario between the White House and Congress.
Regardless of the Senate outcome, it may still be prudent to take tax and estate related actions prior to year-end. Look for a separate note coming this week.
From an employment standpoint, more than 65 million Americans have filed for unemployment since the beginning of March, with more than 15 million workers still receiving jobless benefits. Pre-COVID, in February, weekly unemployment claims were in the 200,000 range. Recently we seem to feel good about the figure dropping below 700,000 – which shows how our perspective during this time has changed. With this many people still unemployed and bankruptcies of retail and restaurants teetering and about to explode, it is critically important how future fiscal and monetary support is structured and implemented.
In Ohio alone, we’ve seen reported COVID cases continually break record highs during late October and early November. Last week this prompted Governor DeWine last week to plead for behavioral changes or face the prospect of restrictions and shutdowns. It’s a scenario playing out in states all across the country. Should we need to revert back to tighter restrictions that we experienced in the spring, we might also be presented with economic implications that come with them.
Last quarter we discussed the concentration of the market in a few large companies such as Apple, Amazon, Microsoft, Alphabet (Google), and Facebook, and how difficult it is for a few stocks to continue to drive market returns. Through the end of the third quarter, those five stocks had returned nearly 50 percent while the rest of the S&P 500 had a return of -3 percent! However, the momentum has recently shifted. In the last three months Value stocks such as Banks and Utilities are up almost 15 percent, whereas the “Big Five” are closer to 4 percent.
One other point to consider, just because a company is large and dominant and might stay at the top of the “largest companies” in the world chart for many years, it doesn’t necessarily mean it is also a great investment going forward. Rather than chasing performance of today’s top companies, we want to be sure we are well positioned to capture the returns of tomorrow’s top companies. We can do that by holding broadly diversified portfolios that hold a wide array of companies and sectors.
Everyone we’ve spoken to recently is experiencing some level of fatigue, expressing that there’s a lot on their mind – the health of family members, the economy, a contentious political environment, and uncertainty about potential year-end actions to take when everything seems so unclear.
Remember, we’re here to help. This also is where the time invested upfront with each of you shows its value. By formulating a solid and adaptable financial plan together and discussing liquidity, cash flows, and reserves, provides the solid footing needed for times like these with many changing facets.
We greatly appreciate the opportunity to work with each of you. We recognize that each client’s situation is unique and incorporates different factors into their investment and financial plan.
As always, if you have any questions or concerns about current market trends and the impact on your personal situation and plan, please contact us and we would be happy to discuss.
We wish you, your families, friends and colleagues all the best as we start the holiday season.
Please follow this link to read the complete Quarterly Market Review | 3Q 2020.