Summary of 3Q/2020: Continued Climb with a September Setback
The news of 3Q/2020 continued to be dominated by the coronavirus pandemic and, of course, the election. While these two stories have always been closely intertwined, their connection increased by an order of magnitude with President Trump’s positive test for COVID followed by hospitalization. As of this writing (10/5/20), he appears to be doing well and is scheduled to leave Walter Reed Medical Center today. Also, the market is up nicely, more than recovering from Friday’s drop. An additional story driving today’s market is recent movement towards passing another stimulus package.
While we in the U.S. are still getting about 40,000 daily new COVID cases, we are also experiencing a similar number of case resolutions (about 98% recoveries and 2% deaths), keeping the number of active cases relatively constant around 2.5 million. Looking at data around the world, there is no question that the fatality rate has decreased with several possible explanations, any or all of which could be true.
Federal Reserve Chairman Jerome Powell made it crystal clear that the Fed will continue to take a highly aggressive stance in supporting the financial markets, even if inflation starts to tick upward beyond its longstanding 2% target. Perhaps unsurprisingly, Congress failed to pass another round of stimulus spending, leaving many unemployed workers with a substantial cut in benefits. At this point, it appears that Mr. Market cares a great deal more about monetary policy over fiscal.
Regarding the upcoming election, we would normally be quoting probabilities from the prediction markets, but they have been upended by President Trump’s illness, with some outlets refusing to take any bets for the time being. One scenario that we should discuss is the possibility of contested election results. There is no question that if this were to occur, the issue would be much more deep-seated than the vote count in a single Florida county. While potentially disruptive and certainly harmful to the morale of the country, we would not anticipate it as a major market-moving event because by January 20, 2021, no matter what happens after November 3rd, we will know who the president will be for the next four years. Besides, in our considered opinion, the market is far more influenced by Federal Reserve policy than the occupant of the Oval Office.
As a component of the economic recovery from the low point of the second quarter, unemployment in the third quarter dropped by about three percentage points to 7.9% for September. Of course, there is more to it in that Personal Income fell 2.7% in August as enhanced unemployment checks ceased. Meanwhile, the Commerce Department reported an additional 837,000 workers filed for unemployment during the last full week of September. It will be a few weeks before we have GDP numbers for the third quarter, but we would expect it to be up substantially from the second quarter.
Once again, the global equity markets enjoyed a quarter well above average with U.S. Large Growth leading the way. However, during September, the global equity markets suffered a setback (down 3.0%, based on VTWAX) with U.S. Large Growth taking the worst hit (down 4.7%). If nothing else, this served as a much-needed reminder that in a market downturn, the companies with the highest valuations can be the most vulnerable.
The weakest equity performer of the third quarter was US Real Estate. While there are many reasons to be pessimistic about this sector (office buildings, hotels, and shopping centers in particular), we do not recommend abandoning it. Investors who are in the accumulation stage are picking up shares at depressed prices which equates to higher expected future returns. One of the worst hit market sectors remains energy; an index of oil and gas stocks was down 57% year-to-date, according to the 10/2/20 Wall Street Journal.
On the bond side, inflation-protected bonds (TIPS) substantially outperformed other investment-grade bonds. This was not due to the sudden appearance of actual inflation but rather movements in real interest rates and the market’s expectation of future inflation, likely related to the recent Fed announcement of its revised approach to addressing inflation.
The table below summarizes the estimated returns for various asset classes based on the performance of Vanguard index funds. Please note that they do not necessarily represent the returns of the funds or portfolios utilized by Clarity Capital Advisors.
Asset Class Ticker Used 3Q/2020 Return YTD 9/30/2020 Return
US Total Market VTSAX 9.2% 5.5%
US Large Growth VIGAX 13.0% 25.8%
US Large Value VVIAX 5.6% -10.7%
US Small Growth VSGAX 7.7% 8.5%
US Small Value VSIAX 4.0% -18.2%
International VTMGX 5.7% -5.7%
Emerging Markets VEMAX 9.0% -1.4%
US Real Estate VGSLX 1.3% -12.7%
Int’l Real Estate VGRLX 3.8% -17.3%
US Bond Market VBTLX 0.6% 7.0%
US TIPS VAIPX 3.0% 9.2%
While predicting market returns remains a fool’s errand, there is no question that with all the health-related and political turbulence we have endured so far, there is still a great deal more turbulence (of all kinds) to come. We will say it again: Our advice is to be invested and stay invested at an appropriate risk level, and by appropriate, we mean an asset allocation to meet your goals that you will hold through all different types of markets.