Big Picture and Key Takeaway

Todd Rebori |

3rd Quarter 2020

Key Takeaway

The stock market continued its strong rally due to the expectation of a continuing economic bounce back. Unfortunately, there are nascent signs within the labor market that the economic recovery could be faltering.  There is a broad acknowledgment that the government will need to provide more direct help to the economy in the form of additional fiscal stimulus, but it does not appear to be forthcoming before the election.  The longer the economy goes without additional support in the face of increasing concerns about the virus, the larger the variability and more uncertain the economic and market outcomes will likely be going forward.

The Big Picture

Global stock and bond markets continued to rebound in the 3rd quarter.  July and August witnessed substantial stock market gains globally, but the rally ran out of steam in September as concerns of a second wave of the virus, and richly valued tech stocks caused a pullback.  Still, the magnitude of the rally since the lows in March remains impressive, led by the continually growing Information Technology sector's dominant performance.

On the economic front, the Commerce Department reported that 2Q 2020 GDP showed a decline of 31.4%, the worst quarterly decline in history, on the heels of a 5% decline in the first quarter.  Since markets are forward-looking, however, solace was found in the following positive data:

  • The median existing-home price for all housing types in August was $310,600, up 11.4% from August 2019 ($278,800), as prices rose in every region.
  • The Census Bureau indicated that retail sales have been helping the recovery, with advanced estimates of U.S. retail and food services sales growth at 2.6% in August, above the level of August 2019.
  • In the manufacturing sector, IHS Markit reported that August data signaled a definite improvement in operating conditions across the U.S., with overall growth accelerating to the strongest since early- 2019.

Unfortunately, not everything is rosy as emerging concerns within the labor market surfaced late in the quarter.  Specifically:

  • Employers added 661,000 jobs in September, a significant slowdown in of job additions from prior months, and the first time since April that job growth was below 1 million.
  • While the unemployment rate fell to 7.9% in September from 8.4% in August, the number "improved" due to an increase in permanent layoffs and more people leaving the labor force, both negative reasons.
  • The number of  U.S. jobs are now 10.7 million below where they were in February, and now larger employers like Disney and United Airlines have recently announced significant job cuts.

While Congress recognizes that the economy will need yet another fiscal stimulus package to help mitigate the virus's ongoing damage, nothing has been passed. It does not appear that anything will happen on the fiscal front before the elections.  On the monetary policy front, the Fed continues to be aggressive, suggesting that it was willing to let inflation trend above its 2% target for some time.  However, in recognizing the limits of monetary policy, Fed Chairman Jerome Powell warned of potentially "tragic" economic consequences if the government does not provide additional support to households and businesses.

 Market Performance

Global Stocks

For the 3rd quarter, all 35 MSCI regional stock indices and 30 out of the 37 country indices were positive. The U.S. stock market continued to outperform its international counterparts.  Additional highlights include:

  • In the U.S., large companies outperformed small companies, and growth stocks continued to outperform value stocks.
  • The positive 3rd quarter was achieved despite a broadly negative September, which halted five straight positive months enjoyed by U.S. stocks.
  • 10 of the 11 S&P 500 sectors delivered positive returns for the 3rd quarter, with the Consumer Discretionary and Information Technology sectors once again leading the way. 
  • The lone negative sector was Energy, which has been on a wild ride in 2020.  While it gained more than 30% in the second quarter, Energy lost almost 20% in the third quarter and is still down over 50% YTD.
  • Internationally, the best regional performer went to the MSCI Nordic Countries Index while Emerging Market stocks also broadly outpaced their developed country counterparts.


Overall, the bond markets' movement led to positive gains for the quarter as bond yields barely budged and remained historically low across maturities.  Additional highlights include:

  • The 10-year Treasury bond yield increased 0.03% for the quarter, and the yield curve remained essentially where it was at the end of the second quarter.
  • Treasury Inflation-Protected Securities delivered the best performance among investment-grade fixed income sectors, as the Fed suggested it was willing to let inflation go above its 2% target. 
  • Non-investment-grade bonds (high yield) continued their strong recovery, delivering returns that nearly clawed back all losses from earlier in the year.
  • Credit spreads, a measure of the risk of default in the bond market, continued their steady declines from the distressed levels in March, providing a nice tailwind for fixed income returns across sectors.
  • Tax-exempt municipal bonds continued their rebound from Q2 but still trail their taxable counterparts by a wide margin year to date.

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Index and Category Definitions

The S&P 500 Index is a capitalization-weighted index of 500 U.S. stocks.  Russell 2000 TR USD is a market cap weighted index The Russell 2000 measuring the performance of approximately 2,000 smallest-cap American companies The MSCI All Country World ex-USA Index is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of developed and emerging markets. The MSCI All Country World ex-USA Index consists of 22 developed and 24 emerging market country indices. The MSCI EAFE Index (Europe, Australasia, Far East) is a free float-adjusted market capitalization index that is designed to measure the equity market performance of developed markets, excluding the U.S. & Canada.  The MSCI Emerging Markets (E.M.) Index is a free float-adjusted market capitalization index that is designed to measure equity market performance of 24 emerging markets countries. Bloomberg Barclays U.S. Aggregate Bond Index is an index of the U.S. investment-grade fixed-rate bond market, including both government and corporate bonds.  ICE BofAML U.S. High Yield Index is an unmanaged index of below-investment grade U.S. corporate bonds.  XZU Gold Spot $/Oz reflects the exchange rate of Gold against the U.S. dollar index