Stocks fared well during the third quarter despite September’s weakness, with the S&P 500 Index returning about 9%. The quarterly gain brought the return through the first nine months of the year to 5.6%. Here we peel back the onion on the third quarter’s stock performance to look at what worked and what didn’t.
In recent months, we have warmed up to Europe as a destination for equity investments in global portfolios. Through July, Europe had done a relatively good job containing the first wave of COVID-19, and cases were plummeting to multi-month lows. Meanwhile, the United States was struggling with its second wave—or perhaps the second phase of the first wave—and was seeing cases surge in July despite the warm summer weather.
Retail sales rose 0.6% month over month in August following July’s downwardly revised 0.9% advance, but sales fell short of Bloomberg’s consensus expectation for a 1% increase. The retail sales control group, which excludes building materials, autos, and gas, fell 0.1% month over month and also missed estimates (source: US Census Bureau).
The S&P 500 Index just closed the door on its best August since 1986, making new all-time highs along the way, while also closing up five months in a row.
“Better late than never.”
We’ve written quite a bit lately about the deterioration in high-frequency data. Indicators of mobility (such as auto and air travel, commuting activity, restaurant diners, etc.) leveled off in July due to the latest wave of COVID-19 cases. The strong rebound in the job market reflected in May and June jobs data has faded, based on the increase in continuing claims reported last week by the US Bureau of Labor Statistics.
The US dollar was remarkably strong during the first quarter of 2020, benefitting from the flight to safety and rallying to nearly a 10% year-to-date gain at the stock market’s low point on March 23. However, as equity markets have recovered, and the US has continued to fight the COVID-19 pandemic, the dollar has given up nearly all of those gains. We think this trend may continue, and if so, it would have important implications for a range of asset classes.
The gradual reopening of the US economy has started to lift Main Street sentiment from depressed levels, according to the Federal Reserve’s (Fed) Beige Book. Despite growing concerns about rising COVID-19 cases in several pockets of the country, economic activity has returned in most industries.
It’s certainly been a wild ride for stocks in 2020. Barely past the halfway point, the year has already brought the worst pandemic to hit the US in over 100 years, an unprecedented government-induced recession as much of the country was locked down, some stomach-churning market volatility, and massive, unprecedented stimulus from policymakers totaling several trillion dollars—that’s trillion with a “t”.
What a quarter the second quarter was, with the S&P 500 Index adding 20.0%, for the best quarter since 1998 and the best second quarter since 1938. Of course, stocks fell 20% in the first quarter, so what we really have is a bad case of whiplash in 2020 thus far.