The U.S. economy continues to rebound from pandemic-related disruptions, although the durability of the rebound from March and April lows will continue to be called into question. The final revision of second-quarter GDP growth came in at an astounding -31.4% decline. Third-quarter estimates are expected to claw back much of the declines, with estimates approximating +25% growth. Preliminary estimates of fourth-quarter growth are ranging between +5% and +10% but are largely contingent on avoiding another wave of a viral outbreak and any associated lockdown.
The U.S. labor market again added jobs in August, following substantial gains in May through July. Employers have now added back about one-half of the jobs lost in April. The most recent employment additions have brought the unemployment rate down to 8.4% from approximately 15% in April. Unfortunately, the pace of increases appears to be slowing as persistently elevated jobless claims in September reflect the realities of an economy continuing to grapple with reopening.
Retail bankruptcies, concentrated in industries such as apparel and footwear, home furnishings, grocery, and department stores, are on pace to rival those reached in the aftermath of the financial crisis. High rates of brick-and-mortar store closures are expected to continue as already-evolving shopping preferences are exacerbated by social-distancing measures.
Despite renewed doubt about the sustainability of the recovery, the U.S. continues to see pockets of optimism. U.S. durable goods orders increased for the fourth consecutive month in August, increasing 0.4% over July levels. Retail sales bounced back from a seven-year low in April to pre-pandemic levels in July and increased 0.6% in August.
Demand for housing also appears to be improving. The S&P CoreLogic Case-Shiller National Home Price Index, which measures average home prices in major metropolitan areas across the nation, rose 4.8% year-over-year in July. Moreover, existing home sales have surged, rising 10.5% on an annual basis in August, according to the National Association of Realtors.
Encouragingly, consumers appear to be growing more optimistic regarding economic conditions. The Conference Board’s consumer confidence index surged to 101.8 in September, up from 86.3 in August, the largest increase since April 2003. Survey participants noted labor market improvement and the quelling of a summer coronavirus surge in parts of the country as reasons for optimism.
Moving into the last week of the quarter, Republicans and Democrats have renewed negotiations regarding another round of coronavirus fiscal relief. Many lawmakers remain skeptical, however, about the chances of reaching an agreement with less than one month left before the election.
While historical election results have shown to have little predictive power over future investment performance, investors appear to be anticipating one of the most volatile U.S. election seasons on record. Derivatives markets are experiencing large price swings on investor concerns over the county’s future political course.
The first Trump/Biden debate that occurred as the quarter came to a close could be described as "chaotic" to say the least. First impressions suggest no substantive changes to the fundamentals of the race, with both sides claiming slight victories.
Government bond yields changed little over the quarter and appear to be in a holding pattern as investors absorb the ebbs and flows of a precarious economic recovery. 2- and 10-year Treasury bond yields finished the quarter at 0.13% and 0.68%, respectively.
Corporate bond spreads, from investment-grade to high-yield, continued to narrow throughout the quarter, suggesting that the Fed’s corporate bond purchase programs are providing a healthy level of liquidity. Importantly, investment-grade corporate bonds have held their ratings better than many investors initially feared. The overall share of investment-grade corporate debt rated triple B (the lowest investment-grade rating) is hovering around where it was at the end of 2019. As a result of spread narrowing, corporate bonds outperformed their government counterparts in the third quarter.
The Federal Reserve left rates unchanged at its most recent meeting, leaving its Federal Funds Target Rate at essentially zero. The committee also forecasted that they do not anticipate raising interest rates through 2023. Consequently, no rate changes are expected at the Fed’s next meeting scheduled for November 5.
Although signs of inflation appear to be a long way off, it’s important to note that the Federal Reserve did implement a new framework that may have substantial consequences for future inflation expectations. The framework effectively encourages the Fed to seek periods of higher inflation to compensate for past periods of below-target inflation, while also relaxing the Fed’s previous emphasis on raising interest rates simply because unemployment rates fall below a level estimated to put pressure on prices.
Treasury yields of selected maturities for recent time periods are displayed below (data from Bloomberg).
|Treasury Bill||Treasury Notes & Bonds|
|3 mo.||2 yr.||5 yr.||10 yr.||30 yr.|
The total return numbers for various fixed income indices over the last 12 months are displayed below (data from Bloomberg).
|3rd Quarter 2020 Returns|
Barclays Capital US Aggregate
|0.62%||BofAML US High Yield||4.71%|
|BofAML US Treasuries||0.18%||BofAML Municipals AAA||0.80%|
|BofAML US Corporate||1.69%||BofAML US Mtge Backed Security||0.11%|
|12-Month Returns (as of 9/30/20)|
|Barclays Capital US Aggregate||6.98%||BofAML US High Yield||2.30%|
|BofAML US Treasuries||8.25%||BofAML Municipals AAA||4.80%|
|BofAML US Corporate||7.84%||BofAML US Mtge Backed Security||4.42%|
Equity markets have been the beneficiary of massive monetary and fiscal stimulus packages which were implemented beginning in the later days of March. Market participants appeared optimistic about the sustainability of reopening the economy throughout much of the quarter.
However, election uncertainty coupled with fading hopes for additional COVID-19-related economic stimulus softened investor sentiment in September. The S&P 500 experienced its fourth straight weekly decline through the last Friday of the month, dropping nearly 8% below its September 2 high. Moreover, the Nasdaq fell into correction territory (10% or greater drop) just three sessions after hitting a record, the speediest-ever such fall, before recovering a portion of its losses by quarter end.
Despite recent stock market weakness, quarterly returns were still strong across the board. Following a second quarter that was the strongest quarterly gain since the fourth quarter of 1998, the S&P 500 added an additional 9% for the third quarter. Growth stocks continued to dominate their value counterparts with the S&P 500 Growth and Value Indices up almost 12% and 5%, respectively. In fact, the technology-heavy Nasdaq surged 11% in the third quarter and rose 45% over the past six months, its biggest two-quarter gain since 2000.
Amazingly, U.S. stocks are essentially back to where they started the year. The Dow and S&P 500 price indices are down about 3% and up about 4%, respectively, over the first three quarters.
On the international front, emerging markets posted similarly strong returns (up almost 10%) compared to their domestic counterparts on optimism over China’s economic outlook and stronger-than-expected export growth. Developed markets, namely European equities, were up a little less than 5%, with investors expressing some heightened concern over a second wave of coronavirus infections.
Below is a table which displays various equity index returns for the past quarter (data from Bloomberg).
|Equity Indices||3rd Quarter 2020|
|Dow Jones Industrial||8.22%|
|S&P 500 Growth||11.75%|
|S&P 500 Value||4.79%|
|Russell 2000 (small-cap)||4.93%|
|MSCI/EAFE (developed international)||4.87%|
|MSCI/EM (emerging markets)||9.65%|
On a sector basis, third-quarter investor sentiment generally favored cyclical sectors over their defensive counterparts. Investors expressed optimism over improving labor market conditions and manufacturing activity. As such, the Materials and Industrials sectors posted strong returns, joining the more consistent market favorites of Consumer Discretionary and Information Technology.
The notable exception to strong sector returns was the Energy sector, which finished the quarter down approximately -20%. Gasoline demand stalled in the later part of the quarter, keeping crude-oil prices near $40 a barrel, essentially where it started the quarter. Traders are also concerned with prospects of higher Libyan oil output as production resumes in the aftermath of waning civil unrest.
The following table details S&P 500 sector total returns for the quarter (data from Bloomberg).
|Return by Stock Sector||3rd Quarter 2020|
|1. Consumer Discretionary||15.06%|
|4. Information Technology||11.95%|
|5. Consumer Staples||10.38%|
|6. Communication Services||8.94%|
|8. Health Care||5.87%|
|10. Real Estate||1.92%|
The Investment Overview is published quarterly by the Union Investment Management Group of Union Bank & Trust Company. Please address correspondence to: Union Bank & Trust, Attn: UIMG, PO Box 82535, Lincoln, NE 68501-2535.