The third quarter of 2020 supported both the bullish and the bearish case for the markets and left investors unclear as to where the fourth quarter might head. The bulls were firmly in control in July and August as U.S. stock markets achieved multiple record highs after the best August performance in over three decades. The strong rally from the March lows seemed unstoppable as most indices moved into positive territory for the year. Bulls were energized by:
- Stronger than expected employment results
- Strength from big technology in the post COVID-19 economy
- Monetary support from central banks and the hope of additional fiscal stimulus
- Better than expected corporate earnings with above consensus forward guidance
- Prospects for an effective vaccine
The bears gained control in September. A 10% market correction from the August highs came quickly. The high flying technology sector with their lofty valuations fell back to the pack while forgotten value plays like Deere, Caterpillar, and Coca-Cola showed signs of life. The bears’ point of view is supported by:
- Fiscal and monetary support for the economy has likely peaked
- Unemployment numbers will remain elevated as small business struggles continue
- Third quarter earnings season must deliver on expanded expectations
- Stock valuations are over extended
- Mounting fiscal deficits are a legitimate concern
Volatility spiked in September, but from a total return standpoint most assets posted positive results in the quarter. A diversified portfolio invested in the S&P 500, international stocks, U.S. bonds, and gold individually returned 8.9%, 4.8%, 0.6%, and 13.3% in the third quarter. These same assets over the trailing twelve months produced returns of 15.2%, 0.5%, 7.0%, and 28.1%. Considering the effects of the pandemic and the impact it had on the economy, these are outstanding outcomes. The patient investor has been rewarded for staying calm during the storm.
While stocks have provided investors with a thrill ride, the bond market has proven to be a safe haven. The U.S. Treasury yield curve was basically unchanged throughout the third quarter. The yield on the 2-year U.S. Treasury note fell 3 basis points to yield 0.13% at quarter end. At the longer end of the yield curve, the 10-year note and the 30-year U.S. Treasury bond rose 3 and 5 basis points respectively to yield 0.69% and 1.46% at quarter end. Credit spreads in both high yield and investment grade corporate debt narrowed meaningfully during the quarter. Stable interest rates and tighter credit spreads kept mortgage rates low keeping the housing market strong. The Fed will be on hold for the foreseeable future, so expect interest rates to remain subdued.
This year can best be described as unpredictable. The pandemic has changed the economy, business, work, school, and our lives in ways we never envisioned just nine months ago. Looking ahead to the fourth quarter, it appears to be equally unpredictable. Questions surrounding COVID-19, a vaccine, the election, the path of corporate earnings, additional fiscal stimulus, and economic growth will likely become clearer by year end.
The financial markets are starting the fourth quarter on a relative high note providing investors a golden opportunity to reevaluate their portfolios and risk exposures. It’s imperative to take a long-term balanced approach to your portfolio and it’s just as important to set your risk tolerance to comfortably weather future volatility. Markets are moving at speeds we never thought possible and it is necessary to properly position your financial plan to stay invested for the long haul.
MARKETS BY THE NUMBERS: