November 2020
US Economy: Q3 surge does not disappoint.
The big summer rebound in the economy materialized as anticipated with Q3 US GDP growth accelerating at a 33.1% annualized pace. Buoyed by COVID stimulus, consumers have led a recovery in spending (retail sales +1.9%) despite slowing progress in labor market repair. Still, US GDP remains 2.9% lower than Q3 2019.
US Stocks: Uncertain stimulus, election worry investors.
US equities posted negative returns for the second consecutive month. A spike in COVID cases, alongside little legislative progress in extending government benefits, and a highly contentious election led many investors to increase cash positions. Small cap stocks bucked the trend on better valuations and post-election outlook.
Foreign Stocks: China drives emerging markets outperformance.
Performance overseas was mixed with developed markets and emerging markets trailing and outperforming US stocks, respectively. Whereas developed markets were broadly negative due to rising global COVID cases and related lockdown measures, EM stocks were driven by China (+5.3%) and its quickly recovering economy.
Fixed Income: Interest rates creep upward.
Interest rates rose during the month, with the 10-year US Treasury up 0.2% to 0.9%. Investors were pricing in the likelihood of a “blue sweep” and the consequent Democratic spending policies in 2021. High yield bonds outperformed as credit spreads continued to tighten.
Real Assets: Infrastructure and commodities diversify.
Real assets zigged when other assets zagged in October and the reasons varied. Infrastructure, which hadn’t performed as well in the summer run up, benefited from lower valuations and an anticipated shift to greener energy options. Commodities rallied on a weaker US dollar and a safe-haven bid for precious metals.
Alternatives: Modest returns.
Hedge funds generally outperformed equities. Relative value strategies outperformed as investors capitalized on elevated volatility, whereas generally trend-following managed futures strategies found themselves whipsawed by the vacillating signals.
Equities Total Return
| OCT | YTD | 1 YR | |
|---|---|---|---|
| U.S. Large Cap | (2.7%) | 2.8% | 9.7% |
| U.S. Small Cap | 2.1% | (6.8%) | (0.2%) |
| U.S. Growth | (3.2%) | 19.1% | 28.2% |
| U.S. Value | (1.0%) | (13.2%) | (8.0%) |
| Int’l Developed | (4.0%) | (10.8%) | (6.9%) |
| Emerging Markets | 2.1% | 0.9% | 8.3% |
Fixed Income Total Return
| OCT | YTD | 1 YR | |
|---|---|---|---|
| Taxable | |||
| U.S. Agg. Bond | (0.4%) | 6.3% | 6.2% |
| TIPS | (0.6%) | 8.5% | 9.1% |
| U.S. High Yield | 0.5% | 0.2% | 2.5% |
| Int’l Developed | 0.3% | 5.6% | 4.5% |
| Emerging Markets | 1.4% | 2.9% | 4.9% |
| Tax-Exempt | |||
| Intermediate Munis | (0.2%) | 3.1% | 3.6% |
| Munis Broad Mkt | (0.2%) | 3.0% | 3.5% |
Non-Traditional Assets Total Return
| OCT | YTD | 1 YR | |
|---|---|---|---|
| Commodities | 1.4% | (10.8%) | (8.7%) |
| REITs | (3.4%) | (15.2%) | (16.0%) |
| Infrastructure | (1.1%) | (19.0%) | (16.1%) |
| Hedge Funds | |||
| Absolute Return | (0.2%) | 0.6% | 1.7% |
| Overall HF Market | (0.1%) | 1.6% | 3.9% |
| Managed Futures | 0.1% | (3.2%) | (3.0%) |
Economic Indicators
| OCT-20 | APR-20 | OCT-19 | |
|---|---|---|---|
| Equity Volatility | 38.0 | 34.2 | 13.2 |
| Implied Inflation | 1.7% | 1.1% | 1.6% |
| Gold Spot $/OZ | $1879 | $1687 | $1513 |
| Oil ($/BBL) | $37 | $25 | $60 |
| U.S. Dollar Index | 115.4 | 122.7 | 116.0 |
Our Take
Election night has come and gone but the election itself is not over. Like many, we were hopeful that we would have a decisive outcome of the presidential race, regardless of the victorious party, on November 3rd, but are not surprised that the process will continue to unfold. There will likely be recounts in battleground states where the tally is very close, and the certification of the results seems to be at least several days away from us. As we’ve mentioned previously, while the presidential race garners the most headlines, it was the senate race that was more meaningful to financial markets and investors.
The “blue sweep” that was anticipated by many seems unlikely and it looks like we will have a divided government once again and the markets reacted favorably. Financial market participants hate uncertainty. And a divided government means landscape-changing legislation is unlikely to be enacted and less uncertainty. This is why we believe markets reacted with a rally following election night, although the magnitude is a little surprising.
Going forward, whoever controls the White House will have the immediate and clearly prolonged task of battling COVID-19. The most significant near-term fallout of the election (as it stands today) is that a potential stimulus package to extend benefits and offset the economic impacts of the pandemic is likely much smaller than democratic proposals. That consideration does not substantially alter our view on portfolio construction. Our focus remains on sourcing long-term opportunities for clients in an environment marked by persistently low interest rates. Included in that, we see infrastructure and alternative investments, such as private equity and debt, as important return drivers for portfolios.
