Remember that 1995 OMC song “How Bizarre”? Did OMC think of 2020 when they wrote that? What a bizarre year 2020 has been. Living through a pandemic has affected all of our lives in so many ways that it’s challenging to think about what’s normal. Then again, both the Cubs and the White Sox are no longer playing baseball so maybe normalcy isn’t too far off! We’ve also seen a lot of unusual activity in the markets this year and that didn’t change in the third quarter.
Let’s jump right into it and look at how the major asset classes fared in 3Q20:
Equities: Despite a losing September, the historic stock market recovery continued in the third quarter as the economy continues to improve after the pandemic shut most of it down earlier. The S&P500 was up 8.9%, the Dow Jones Industrial Average was up 7.6%, and the MSCI AC World Index ex-USA, a good international proxy, was up 6.3%. As we’ve said before, Wall Street is not Main Street and in 2020 we’re not operating with the normal play book. There are the “haves” and the “have-nots” with a lot of companies losing business and a select few that have benefitted from this Covid environment. This has created unprecedented divergence amongst the different styles, sizes, and countries represented in the stock market.
One can see from the chart above that while US Growth bounced off March lows and surged higher to positive year-to-date (“YTD”) results, most other categories are still in negative territory.
The chart below dives deeper within the domestic equity returns by style and market cap. It’s clear that growth / bigger market cap outperformed value / smaller cap so far this year to unprecedented levels. Although, that trend somewhat reversed in September in what some see as a start to a cycle shift. We would expect a reversion to the mean to continue – we’ve frequently talked about a “rotation” which we see as investors shifting money out of the recent high-fliers to these other areas that have underperformed like smaller cap and value. At some point, fundamentals have to matter. As discussed in our blog last week, many individual investors piling into the market for the first time has pushed these tech darlings up to not only high price levels, but valuation levels too! It’s so important to stay diversified in a time where there are pockets of the stock market that appear rather frothy.
Equity Returns by Style QTD & YTD
Source: FactSet, Russell Investment Group, Standard & Poor’s, J.P. Morgan Asset Management.
Fixed Income: After a wild last couple of quarters, things generally calmed down in bond land. The Barclays US Aggregate Bond Index registered a +0.6% showing for 3Q20 and now +6.8% YTD. International fixed income exposure continued to bounce back after being beaten hard earlier this year as evidenced by the Barclays Global Aggregate Bond Index showing a +2.7% 3Q20 return and now +5.7% YTD. Big news came out during the third quarter when the Fed announced that they’re raising their inflation target rate and would leave rates low for years. That’s a nod for stocks because with rates so low, returns for fixed income will most likely be modest in the near future.
Alternatives: Alternatives also enjoyed the rebound, as evidenced by the Wilshire Liquid Alternatives Index, +2.3% for the quarter and now off only 1.1% for the year. Gold, represented by the iShares Gold Trust, continued its ascent, hitting an all-time high in July, up 5.9% in 3Q20 and 23.1% YTD! Another area that fared well within alts were “event driven” strategies, up 2.1% for the quarter and slightly higher on the year as represented by the BlackRock Event Driven Equity Fund. These are alternative strategies that employ the use of both long and short positions of companies believed to be undergoing transformative corporate events, e.g. mergers and acquisitions, spinoffs, financial restructurings, management changes, and other catalysts.
This was definitely one the craziest first nine months to a year, with lots of big swings along the way. Fortunately, diversified investors should be close to break-even now and breathing a sigh of relief. As we look ahead, uncertainty remains:
- Politics: The biggest uncertainty is what changes will come to Washington DC this year. And it appears that we may have a Presidential Election where the results may not be known immediately. The headlines and social media along with this country’s divisiveness will be more on display than ever in this 4th quarter of 2020.
- Stimulus: Will we ever see another stimulus package? Many folks are in desperate need of this and sooner rather than later. One would hope we’ll get something by year-end once we’re past the Election.
- Another Covid wave coming?: Even with Covid cases creeping up around the country, we don’t see governments enforcing the same broad-based strict shutdowns, which means the economy should hang in there until a vaccine is approved and distributed.
So, yes, we have some potential challenges still left in this bizarre year of 2020 and we’re many months away from getting back to “normal”, but good and more stable times lay ahead. Now’s the time to remain calm, stay disciplined, and keep peace of mind. Here at DWM, we’ll be doing just that as we help our clients by continuing to eliminate the potential landmines hiding within their financial plans and portfolios.
Before you know it, 2020 will be in the rear view mirror and we can look forward to better times…who knows, maybe there’s even a Cross Town World Series between the Cubs and Sox in our future…how bizarre that would be…
Brett M. Detterbeck, CFA, CFP®
DETTERBECK WEALTH MANAGEMENT