2020: Q3 Market Review and Looking Ahead
Global Economies and Markets
Q3 Market Review: The third quarter of 2020 began with investor optimism and continued stock market strength. Many areas of the capital markets saw positive returns in July and August despite uncertainty around the trajectory of the recovery. But by the tail end of the quarter, the looming November elections, as well as the implications of potential stimulus and tax legislation were top of mind for many investors as volatility entered the markets once again.
As of September 30, year-to-date returns are mixed across the capital markets in this Q3 market review. Many parts of the equity market are still negative for 2020, including smaller companies, value-oriented stocks, non-U.S. equities, and energy, to name a few. On the flip side, the large-cap growth area of the market is posting solid double-digit returns this year due to the heavy weight in technology stocks. The top five stocks (Facebook, Microsoft, Amazon, Alphabet and Apple) in the S&P 500 Index comprise only 23 percent of the index, but account for 1/3 of the positive performance year to date. The S&P 500 year to date returns would be negative if these stocks were excluded.
Economic data in the U.S. continues to be mixed. Unemployment, which peaked at 14.7 percent in April, has since fallen to 7.9 percent. While unemployment has come down by almost half, we are still faced with 11 million jobs lost since February. This compares to a loss of 9 million jobs during the global financial crisis of 2007-2009. After we saw the largest decline of US Gross Domestic Product (GDP) on record in the second quarter (-31 percent annualized), the Federal Reserve projects 2020 GDP to contract by just -3.7 percent year over year. This is slightly better than the -6.5 percent figure expected in June.
This quarter the Federal Reserve (Fed) announced a new strategy that will allow the Central Bank to tolerate periods of inflation above the 2 percent goal rate. This change in focus takes a much broader approach to managing inflation, after the Fed’s benchmark inflation measure has struggled to rise over the 2 percent target over the last several years. The Fed further stated its intention to keep rates low, with no further rate hikes until at least 2023. In other words, we can expect a lengthy period of low interest rates, which is favorable for borrowers, but difficult for fixed-income investors.
Throughout this year, investors have dealt with an unusual environment, and often uncharted territory, in regard to a global healthcare pandemic, economic lock downs around the globe, and concerns over personal health and well-being. As we enter the final quarter of 2020, we see the potential for more volatility ahead. Uncertainty surrounding the economic recovery and rising COVID-19 cases around the globe provide shaky ground for the fourth quarter. In addition, a tense election, whose results may not be known in November, may also contribute to shorter-term volatility.
What Does This Mean For You?
Despite these unsettling times, we continue to encourage you to move forward with a sense of calm regarding your financial picture after this Q3 market review. We believe that prudent diversification and careful planning can successfully navigate challenging environments, including the historically volatile one we have witnessed in 2020.
This is the time when having an advisor like Domani Wealth, who is focused on your financial goals, can really make a difference in your long-term financial plan. We view the current environment as an opportunity to revisit your strategic portfolio allocation, take another look at your cash needs, make portfolio shifts to minimize tax liability, and review your long-term goals. If you have any questions or would like to meet and review your financial situation, please call our office for a virtual appointment.
*Data sources: Bloomberg, Callan Independent Adviser Group
Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this article serves as the receipt of, or as a substitute for, personalized investment advice from Domani. A copy of Domani’s current written disclosure brochure discussing our advisory services and fees continues to remain available upon request.