The impressive recovery from the Spring’s Covid 19 led recession continued in Q3 amid social unrest, increasingly chaotic political theatre, and ongoing struggles to bring the pandemic under control. Economic indicators have shown extended improvement with the unemployment rate dropping to 8.4% in August, an improved labor force participation rate, rising industrial production, increasing retail sales, and strong spending on food and beverages. However, the rate of gains in many of these areas has began to wane, signaling a possible slowdown in the recovery.
The Federal Reserve’s accommodative stance continued with the announcement that they will now use average inflation targeting in setting the policy interest rate, allowing for temporary overshoots in inflation. The new policy means the Fed is willing to allow inflation to go above its 2% target to make up for periods that it has lingered below. In addition, the Fed’s own projections of the future path of interest rates suggests that policymakers see rates around 0% through 2023. However, US markets struggled to hold some gains late in the quarter as Covid-19 cases resurged in Europe, additional fiscal stimulus measures were delayed due to political posturing, and an uncertain election outcome in November looms as a real wildcard.
The US equity market posted positive returns for the quarter, outperforming non-US developed markets but underperforming emerging markets. Value underperformed growth across large and small cap stocks. Small caps underperformed large caps. REIT indices underperformed equity market indices.
Developed markets outside the US posted positive returns for the quarter but underperformed US and emerging markets equities. Value underperformed growth. Small caps outperformed large caps.
Emerging markets posted positive returns for the quarter, outperforming the US and developed ex US equity markets. Value underperformed growth. Small caps outperformed large caps.
In US dollar terms, Sweden and Denmark recorded the highest country performance in developed markets, while Portugal and Spain posted the lowest returns for the quarter. In emerging markets, India and Pakistan recorded the highest country performance, while Turkey and Thailand posted the lowest performance.
In developed markets, all currencies appreciated versus the US dollar. In emerging markets, currency performance versus the US dollar was mixed. Most currencies generally appreciated versus the US dollar, but some, notably the Turkish lira and Russian ruble, depreciated.
US real estate investment trusts underperformed non-US REITs during the quarter.
The Bloomberg Commodity Index Total Return returned 9.07% for the third quarter of 2020. Lean hogs and Silver were the best performers, returning 30.76% and 25.06%, respectively. Low sulfur gas and Heating oil were the worst performers, declining 9.27% and 7.51%, respectively.
Interest rate changes were mixed in the US Treasury fixed income market during the third quarter. The yield on the 5-year US Treasury note decreased by 3 basis points (bps), ending at 0.31%. The yield on the 10-year US T-note rose by 3 bps to 0.64%. The 30-year US T-bond yield increased by 5 bps to 1.46%. On the short end of the yield curve, the 1-month US Treasury bill yield decreased to 0.08%, while the 1-year T-bill yield decreased by 5 bps to 0.14%. The 2-year US T-note yield finished at 0.09% after a decrease of 2 basis points. In terms of total returns, short-term corporate bonds returned 0.92% for the quarter. Intermediate-term corporates returned 1.33%. The total return for short-term municipal bonds was 0.83%, while intermediate munis returned 1.40%. Revenue bonds outperformed general obligation bonds.
Changes in Government bond interest rates in the global developed markets were mixed for the quarter. Longer-term bonds generally outperformed shorter-term bonds in global ex-US developed markets. Short- and intermediate-term nominal interest rates were negative in Japan, while all maturities finished the quarter in negative territory in Germany.
The Q3 2020 Market Review features world capital market performance and a timeline of events for the past quarter. It begins with a global overview, then features the returns of stock and bond asset classes in the US and international markets.
As with any market condition, a sound plan makes the ups and downs much more manageable. Get in touch if you would like to review your plan. Stay safe and be well!
