September 30, 2020
Following up the remarkable rally in the 2nd quarter was going to be difficult. But, to the surprise of many, the 3rd quarter saw the S&P 500 index reach a new all-time high before a mild pullback in September. Markets (and all of us) continue to “look ahead”, anticipating that as time progresses a vaccine will lead to a return to normalcy. The question for investors is whether this equity recovery is premature. After all, the Fed has announced an extended hold at 0% rates. The Presidential election is on the horizon. And a vaccine, which seems likely to be approved shortly, will take some time to effectively distribute. While stock indexes remain elevated, these on-going issues leave many market observers uneasy.
After posting a 20% gain in the quarter ending in June, the S&P 500 gained as much as another 15% before settling to finish up 9% for the 3rd quarter. Once again, technology stocks played a dominant role in the market returns. Stocks such as Tesla and Apple rallied on news of a stock-split (which does not increase the value of the company!). Many market observers attributed this market behavior to an increase in day traders using free trading services such as Robinhood, and the speculative nature of these share moves seems to support that theory. A technology-led correction did ultimately end the multi-month rally, but markets recovered before quarter-end to still finish with notable gains. The VIX volatility index remains relatively elevated with readings in the mid-20s- a far cry from March when the gauge reached the low 80s.
A key reason for the broader stock rally is the extremely accommodative path laid out by the Fed. Chairman Powell laid out expectations for the Fed funds rate to stay at or near 0% out as far as 2023, which of course means that high-quality bond rates should be quite low for at least that long. The 10-year Treasury yield remains largely unchanged in a range from 0.65% to 0.70%. This “holding pattern” type approach led to an almost flat quarter for both Treasuries and the broader investment-grade bond class. High Yield bonds had a solid quarter, with the index up about 4% for the period, but they still lag well behind investment-grade bonds year-to-date after a weak first half of 2020. Extending bond duration today does not provide much income, so fixed income investors have been forced to reduce credit quality or accept lower yields.
Looking ahead, much attention will be placed on the election, coronavirus infection rates, the willingness for respective states to re-open, the open Supreme Court seat following the death of Justice Ginsburg, and on-going economic issues related to the lockdown. And while 2020 has been a year to forget, for most investors it has also been a year of resiliency. We continue to advocate market participation, and believe that investors can continue to find attractive values and portfolio income despite today’s challenges.
We have identified key data points in recent market commentaries. While these metrics can be difficult to rationalize in this unusual environment, here is where they stand:
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