3Q20 Market Overview
Despite the spread of Covid-19, swift and impressive global financial leadership decisions coupled with healthy consumer consumption helped further elevate equity markets. Without the positive financial safety net, consumers may have gravitated into more cautious spending patterns and derailed the recovery.
With only a few weeks until the election, uncertainty and concern are front and center as both sides fret over the election results and how this might impact the market. From a historical equity return perspective, markets have performed almost identical regardless of the Presidential party affiliation. If President Trump is re-elected, his second term agenda will focus on jobs, taxes and the economy. If Joe Biden is elected, his agenda will focus on health care, climate change and taxes. Once the elections results are final, the markets will be relieved that this uncertainty is behind us and attention will return to overcoming Covid-19 and stimulus to continue our economic recovery.
Regardless of the election results and market direction, our rebalancing process will take advantage of the market movements to shift towards our target allocations in the most tax-efficient manner possible while maintaining your desired risk level and fulfilling your cash flow requirements. Multi-year income and estate tax planning will become increasingly important once the election results are known.
U.S. Equity Markets
U.S. equity markets added to the impressive rebound from the March lows with the Russell 3000 advancing 9.2% during the quarter. Following an historic 31% 2Q contraction in U.S. economic output, the projected 35% quarterly economic gain is equally extraordinary. This inspiring recovery was made possible by quick and lucrative fiscal and monetary stimulus to help investors focus on the future rather than the pandemic. Fortunately, the recovery has been positive enough to recoup half of the 22 million payroll casualties, but unemployment is still elevated at 7.9% and initial jobless claims at the end of September totaled 837,000. Along with the payroll expansion, consumer confidence rose and pending home sales jumped nearly 9% over the past month. Even though the virus is still not contained, the focus will return to actual company profit margins in light of increasing Covid-19 cases and vaccine development.
International Equity Markets
International developed equity markets finished the quarter with a 4.8% gain for the MSCI EAFE. The lockdown limitations had a lingering effect on the Eurozone economy. Unfortunately, the recovery has been underwhelming and ECB President Christine Lagarde warned that things are “a bit more shaky” amid a second wave of infections in France and Spain. However, the ECB is prepared to use all available tools to produce a more attractive outcome. After Japan’s economy experienced a sharp pullback resulting mainly from shrinking personal consumption, the growth prospects in 2021 are looking much more attractive, especially since they have been able to contain Covid-19 cases like no other developed country. The MSCI emerging markets outpaced the developed markets with a solid 9.6% gain. China was the first to tame the virus and seems to be a leading indicator on what the rest of the world can expect in terms of recovery and virus suppression. So far, China has inoculated over 350,000 people with vaccines that are undergoing clinical trials. Both developed and undeveloped international markets look more attractive from a valuation perspective compared to U.S. markets; however, it will continue to take additional government stimulus to overcome the coronavirus toll and jump start stagnant international economic growth.
Fixed Income Markets
Safety-minded investors experienced slightly positive results as the closely watched Barclays Aggregate rose 0.62% during the quarter. Strong demand for US Treasuries continued to hold interest rate yields anchored near history lows. The 10-year Treasury yield barely moved during the quarter and edged modestly from 0.66% on June 30 to 0.69% on September 30. Given the modest increase, US Government securities held steady considering that most of their impressive gains were realized in the first quarter. The Barclays US Government Long posted a 0.13% quarter gain, Intermediate 0.20% gain and Short 0.10% gain. In the international fixed-income arena, the JPM Non-US Unhedged gained a solid 4.4%. The Barclays Municipal finished the quarter with a gain of 1.2% as investors worried less about the economic strain municipalities face.