Capital Markets Commentary | Capital Markets Update Q3 2020
The third quarter started off with a bang in a continuation of the second quarter’s sharp rebound. By August 18, the S&P 500 Index fully recovered the 34% loss experienced during the February-March correction. As cities across the globe continued their re-opening plans after pandemic-induced shutdowns and central banks sustained their support for global markets, markets moved higher during July and August. In September, market sentiment turned negative, with most risk assets posting losses. Still, the third quarter was solid overall, with most market segments posting positive results.
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- The trend of growth stock dominance – particularly for technology-oriented names – continued into the third quarter, as the Russell 3000 Growth Index’s 13% return trounced the 5% return of the Russell 3000 Value Index.
- Credit markets remained strong, with the Bloomberg Barclays U.S. Corporate High Yield and S&P/LSTA Leveraged Loan indexes both returning over 4% during the third quarter.
- The MSCI Emerging Markets Index posted a solid 9.6% return, although the results were driven primarily by Asian companies in the technology/internet sectors.
- Value stocks lagged again during the third quarter, driven primarily by the large weighting in subpar-returning financial stocks and dreadful performance in the energy sector.
- Energy sector stocks and MLPs posted large losses during the quarter on concerns of weakening oil demand.
- With Treasury yields stabilizing at such low levels, it’s perhaps no surprise that the BloombergBarclays U.S. Treasury Bond Index posted a paltry 0.2% gain for the third quarter.
Since the pandemic-induced market sell-off in the first quarter, markets have rallied sharply but the gains have been far from uniform across companies and industries. Returns for the S&P 500 Index have been narrowly led by a handful of technology/internet stocks – in particular, Amazon, Apple, Facebook, Google and Microsoft. A market capitalization-weighted basket of those five stocks were up 56% through the first eight months of 2020, while the rest of the S&P 500 Index was flat. However, sentiment shifted during the month of September, with these five names falling 9% while the remaining stocks fell just 2%.
This change in leadership from growth to value stocks was limited to large cap stocks. While the Russell 1000 Growth Index trailed its Value counterpart during September, it did not carry over to small caps – with the Russell 2000 Value Index once again lagging growth names, returning -5% and -2%, respectively.
Value tends to lag entering a recession and outperforms as the economy recovers. It appears that stocks have not yet fully priced in a sustained, broad-based recovery in economic activity.
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Bonds are subject to interest rate, price, and credit risks. Generally when interest rates rise, bond prices fall.
Investments in commodities may have greater volatility than investments in traditional securities.
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High-yield fixed income securities are subject to liquidity and credit risk, and tend to be more volatile than investment grade fixed income.
Unless otherwise noted, all data herein is as of September 30, 2020.