2020 Q3 Quarterly Market Commentary

Quarterly

A Very Solid Third Quarter

Global equity markets continued their rebound from earlier this year, despite struggling in the final month of the quarter. By the time the third quarter closed, investors saw that:

  • The DJIA ended the third quarter up 7.6%
  • The S&P 500 ended the third quarter up 8.5%
  • NASDAQ ended the third quarter up 11.5%

It should be noted that the positive third quarter came after what many will see as validation of that September Swoon theory – when the month of September doesn’t treat equities particularly well. In fact, this past September, we saw global equity markets reverse course, halting the five straight positive months enjoyed by U.S. equity markets as:

  • The DJIA finished September down 2.3%
  • The S&P 500 finished September down 3.9%
  • NASDAQ finished September down 5.2%

It seems as if the mostly positive economic news from August gave way to a mix of negative and positive news during the third quarter, which might have contributed to the markets’ retreat during the final month. But despite September’s retreat, Wall Street was generally optimistic as the economy continued to gradually reopen for business.

  • Volatility, as measured by the VIX, trended down for most of the quarter, except for a spike in early September, as it started July at about 28 and ended September at 26
  • West Texas Intermediate Crude trended sideways during the third quarter, after a significant drop in early April. In fact, the price difference for a barrel of oil from the beginning of the quarter to the end was about 60 cents

Market Performance Around the World

For the second quarter of 2020 every one of the 35 MSCI regional indices and all 37 country indices were positive. For the third quarter of 2020, all 35 of the MSCI regional indices were again positive and 30 of the 37 were also positive. The 35 out of 35 statistic is especially impressive because it was not so in September – as the last month saw all 35 retreat to end the quarter.

The best regional performer went to the MSCI Nordic Countries Index – which includes Denmark, Finland, Norway and Sweden – as it jumped 13.78%.

Index Returns 3Q 2020
MSCI EAFE 4.20%
MSCI EURO 3.85%
MSCI FAR EAST 5.21%
MSCI G7 INDEX 7.89%
MSCI NORTH AMERICA 9.03%
MSCI PACIFIC 4.52%
MSCI PACIFIC EX-JAPAN -0.97%
MSCI WORLD 7.52%
MSCI WORLD EX-USA 4.32%

Source: MSCI. Past performance cannot guarantee future results

A Good Quarter Overall

Among the S&P 500, 70% of stocks had gains in the third quarter. And of the 30 companies in the DJIA, 24 of the 30 were positive this quarter too.

During the quarter, investors digested a lot of economic news and corporate earnings announcements and while there were a few surprises along the way, the markets did not react strongly one way or the other. Many on Wall Street might suggest, however, that the biggest news of the quarter was from the Federal Reserve.

More specifically, the Fed announced a shift to an average inflation target, suggesting that it was willing to let inflation trend above its 2% target to “average” the periods of time where inflation was below 2%. The result is that rates are likely to remain low for quite some time and that in turn is generally good for equities – especially growth names.

Worst GDP Decline in History

On September 30th, the Commerce Department reported that its “Third Estimate” of 2Q2020 GDP improved marginally to a decline of 31.4%. But saying it improved marginally seems disingenuous on its face because this 30%+ decline is on the heels of the 5% decline in the first quarter. And whether the number is 31.4% or 32.9% (from the second estimate), it’s still the worst quarterly decline in history – by a long shot.

real GDP

Housing Stays Hot

Toward the end of the quarter, the National Association of Realtors released Existing Home Sales Data for the month of August and not only was August the third consecutive month of positive sales gains, but all four major regions of the country experienced month-over-month and year-over-year gains. Consider these eye-popping stats:

  • Total existing-home sales rose 2.4% in August.
  • Sales were up 10.5% from a year ago.
  • August’s national price increase marks 102 straight months of year-over-year gains.
  • Unsold inventory sits at a 3-month supply.
  • Properties typically remained on the market for 22 days in August.

Skyrocketing Home Prices

Consider these eye-popping price increases:

  • The median existing-home price for all housing types in August was $310,600, up 11.4% from August 2019 ($278,800), as prices rose in every region.
  • Existing-home sales in the Northeast jumped 13.8% in August and the median price of $349,500 was a 10.4% increase from a year ago.
  • Existing-home sales in the Midwest increased 9.3% from a year ago and the median price of $246,300 was a 10.7% increase from a year ago.
  • Existing-home sales in the South rose 13.0% from a year ago and the median price of $269,200 was a 12.3% increase from August 2019.
  • Existing-home sales in the West leapt 9.6% from a year ago and the median home price of $456,100 was a 11.8% jump from August 2019.

Retail Sales Beyond Pre-COVID Levels

Mid-way through September, the Census Bureau issued a press release that can be summarized as follows: retail sales have been leading the 2020 recovery and since June have exceeded February’s pre-COVID levels. Specifically:

  • Advance estimates of U.S. retail and food services sales for August 2020 were 2.6% above August 2019.
  • Total sales for the June 2020 through August 2020 period were up 2.4% from the same period a year ago.
  • Nonstore retailers were up 22.4% from August 2019, while clothing and clothing accessories stores were down 20.4% from last year.

U.S. Manufacturing Expands

On September 1st, IHS Markit ran the headline screaming: “Fastest manufacturing expansion since January 2019” and then wrote the following:

“August data signaled a solid improvement in operating conditions across the U.S. manufacturing sector, with overall growth accelerating to the strongest since early- 2019. The upturn reflected faster increases in output and new orders, with firms also indicating a renewed rise in employment. Moreover, companies registered the highest degree of confidence in the outlook for output over the coming year since April 2019 amid hopes of further growth of client demand.”

In addition, the following was reported:

  • Faster upturn in new orders as export growth hits four-year high;
  • Quickest rise in employment since November 2019; and
  • Cost pressures strongest since early 2019.

Construction Spending Stays Strong

On September 3rd, it was reported that:

  • Total construction spending during July 2020 was 0.1% above June’s spending and 0.1% below July 2019’s spending
  • During the first seven months of this year, construction spending amounted to $792.6 billion, 4.0% above the same period in 2019

Fewer Companies Issuing Earnings Guidance

Research firm FactSet reported that for the second quarter, there were only 53 of the S&P 500 companies issuing quarterly EPS guidance, which was the lowest number of companies issuing guidance since FactSet began tracking this metric in 2006.

As of September 25th, only 67 companies have issued guidance for the third quarter, which is well below the five-year average of 104. And if that number of 67 holds, it will be the second lowest number of companies issuing guidance behind the record set last quarter.

Asset Class & Style Performance

The first quarter of 2020 was difficult for almost all investors, the second quarter was almost the complete opposite, and the third quarter was good for most investors as all the major asset classes and styles turned in very respectable – and most importantly green – numbers across the board.

For the quarter, Growth continued their dominance over Value names and Emerging Markets turned in another very positive quarter. Interestingly, the gap between Growth and Value is shrinking, as Value outpaced Growth for the last month of the quarter. Global REITs continued to struggle and while the quarter was positive, the YTD is still very red.

Index Returns 2019 YTD Q3 2020
Global REITS 24.40% -21.30% 1.70%
Value 22.70% -14.10% 4.10%
DM Equities 28.40% 2.10% 8.10%
Growth 34.10% 19.20% 11.80%
Commodities 7.70% -12.10% 9.10%
Global Agg 6.80% 5.70% 2.70%
Small Cap 26.80% -6.10% 7.60%
MSCI EM 18.90% -0.90% 9.70%

Source: Barclays, Bloomberg, FactSet, FTSE, MSCI, J.P. Morgan Asset Management. DM Equities: MSCI World; REITs: FTSE NAREIT All REITs; Cmdty: Bloomberg UBS Commodity Index; Global Agg: Barclays Global Aggregate; Growth: MSCI World Growth; Value: MSCI World Value; Small cap: MSCI World Small Cap. All indices are total return in local currency. Past performance is not a reliable indicator of current and future results.

Sector Performance

The overall trend for sector performance since the end of the first quarter has been mixed, as performance leaders and laggards have rotated all year. For example, at the end of the first quarter, every single one of the 11 S&P 500 sectors turned in negative numbers whereas the end of the second quarter saw all 11 sectors turn in positive numbers.

Reviewing the sector returns for the third quarter and YTD through September 30, 2020, we saw that:

  • 10 of the 11 S&P 500 sectors were painted green for the third quarter of 2020
  • The Energy sector was the worst performer for the third quarter as it lost almost 20%
  • The differences between the best performing and worst performing sectors in Q3 were once again dramatic, with 10 sectors outpacing the Energy sector dramatically
  • On a YTD basis, the differences between the best and worst performing sectors is just as dramatic, with the Information Technology sector up over 27% YTD and the Energy sector down a whopping 50%+
  • Speaking of Energy, this sector has been on a wild ride in 2020 as it gained more than 30% in the second quarter, lost almost 20% in the third quarter and is still down over 50% YTD

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