October 2020
US Economy: Q4 unlikely to match Q3 surge.
While investors continue to expect a big rebound in Q3 US GDP growth, September data indicated a stalled economic reopening and that the benefits of early COVID-19 stimulus programs may have run their course: Improvements in consumer activity have leveled off and unemployment remains near 8% as private hiring has slowed.
US Stocks: Equities take a breather.
After five straight months of positive returns, US equities sold off in September. Investors took the opportunity to lock in gains, with additional stimulus in doubt and valuations lofty by many traditional metrics. The previously high-flying tech sector (-5.4% in Sept.) contributed the most to the decline.
Foreign Stocks: Japan outperforms.
Japan was the only reason non-US developed markets fell less overall than the US. The country benefitted from lower valuations, yen appreciation, and the likely continuation of the stimulus policies of former Prime Minister Shinzo Abe, despite business surveys suggesting a lack of optimism for the coming year.
Fixed Income: Pause in credit recovery.
Mirroring equity markets, the riskier fixed-income sectors sold off with high-yield bonds among the worst performers. Enthusiasm for the Fed’s programs and low interest rates have been overtaken by Q4 uncertainty and ETF outflows. Muni bonds were stable as state and local revenue collection has held up much better than feared.
Real Assets: Oil rebound stumbles.
Cyclical commodities generally struggled, including crude oil which fell nearly 10% in September on rising concerns that demand for transportation fuel will take longer to recover. Gasoline demand remained below pre-COVID levels over the summer while airlines continue to cut jobs and forecasts for air traffic.
Alternatives: Resilient if unspectacular.
While hedge funds in aggregate have struggled to meet investor expectations for much of the last decade, recent results indicate they are likely to be important diversifiers going forward: Record low US interest rates and bond yields have reduced the traditional benefits of safe-haven assets such as high-quality bonds and cash.
Equities Total Return
| SEPT | YTD | 1 YR | |
|---|---|---|---|
| U.S. Large Cap | (3.8%) | 5.6% | 15.1% |
| U.S. Small Cap | (3.3%) | (8.7%) | 0.4% |
| U.S. Growth | (4.6%) | 23.0% | 36.1% |
| U.S. Value | (2.6%) | (12.2%) | (5.7%) |
| Int’l Developed | (2.6%) | (7.1%) | 0.5% |
| Emerging Markets | (1.6%) | (1.2%) | 10.5% |
Fixed Income Total Return
| SEPT | YTD | 1 YR | |
|---|---|---|---|
| Taxable | |||
| U.S. Agg. Bond | (0.1%) | 6.8% | 7.0% |
| TIPS | (0.4%) | 9.2% | 10.1% |
| U.S. High Yield | (1.0%) | (0.3%) | 2.3% |
| Int’l Developed | (0.2%) | 5.3% | 4.8% |
| Emerging Markets | (0.0%) | 1.5% | 5.1% |
| Tax-Exempt | |||
| Intermediate Munis | 0.1% | 3.2% | 4.2% |
| Munis Broad Mkt | (0.1%) | 3.2% | 3.8% |
Non-Traditional Assets Total Return
| SEPT | YTD | 1 YR | |
|---|---|---|---|
| Commodities | (3.4%) | (12.1%) | (8.2%) |
| REITs | (2.7%) | (12.3%) | (12.2%) |
| Infrastructure | (3.0%) | (18.1%) | (13.9%) |
| Hedge Funds | |||
| Absolute Return | 0.3% | 0.3% | 1.9% |
| Overall HF Market | (0.2%) | 1.6% | 4.2% |
| Managed Futures | (2.0%) | (3.5%) | (5.5%) |
Economic Indicators
| SEPT-20 | MAR-20 | SEPT-19 | |
|---|---|---|---|
| Equity Volatility | 26.4 | 53.5 | 16.2 |
| Implied Inflation | 1.6% | 0.9% | 1.5% |
| Gold Spot $/OZ | $1886 | $1577 | $1472 |
| Oil ($/BBL) | $41 | $23 | $61 |
| U.S. Dollar Index | 118.3 | 121.3 | 117.4 |
Our Take
In our last few reports, we observed that financial markets had settled into a level of complacency and that news on the virus or the US presidential election could rattle the relative calm. It didn’t take long for that occur, as September was marked by a broad if not dramatic “risk-off” investor sentiment. That said, the impetus behind the decline in equity and credit markets seemed to be as much about investors taking a breather amid the furious recovery of the last several months, based on legitimate questions about additional US stimulus and mounting concerns on the renewed global spread of COVID-19.
October began with the news that President Trump had tested positive for COVID-19. We had considered the possibility of that when British Prime Minister Boris Johnson fell ill with COVID-19 last spring, and our expectation is that the US will maintain continuity of government and this will not be a substantial market mover. Point in fact, equity markets were only modestly negative the morning after the announcement. Still, the timing of the news adds uncertainty leading into what was already likely to be a volatile period, with political wrangling over the Supreme Court nomination and additional COVID aid still being negotiated in Congress ahead of November 3.
Portfolio Positioning
We are pleased to have taken a measured approach to adding risk to portfolios over the last few months, as financial markets arguably got a bit ahead of themselves. Additionally, we are glad to have maintained our positions in municipal bonds, which have outpaced the wider fixed-income market in recent months as catastrophic state budget crises haven’t broadly materialized as some expected.
As we look ahead, our focus remains on sourcing long-term opportunities for clients in an environment marked by persistently low interest rates. We think rates that stay “low for longer” will be a key characteristic of the financial markets going forward. And this will require a rethinking of fixed-income allocations, including seeking to obtain the benefits traditionally provided by bonds (income, diversification, etc.) through other asset classes, including alternative investments.
