The third quarter of 2020 started off with bullish sentiment supported by stronger than expected employment results, the hope of additional stimulus, better than expected corporate earnings, and prospects for a vaccine. In the month of August the stock market saw record highs and ended with its best performance in over 30 years, despite increased COVID cases across the country. However, September was a different story with the possibility of fiscal and monetary support fading, small businesses continuing to struggle, and mounting fiscal deficits becoming a legitimate concern. As a result, volatility spiked in September, but the quarter ended with positive results across all the major indices.
The recovery in the equity markets continued during the third quarter with the S&P 500 posting gains of 8.9% as technology and other “stay-at-home” stocks continued to perform well. Small- and mid-cap companies, as measured by the Russell 2000 Index and Russell Midcap Index, did not increase as much as large cap companies during the quarter, returning 4.9% and 7.5%, respectively.
Growth stocks continued to significantly outperform value stocks across all market capitalizations during the quarter. Over 40% of the Russell 1000 Value Index is allocated to industries with negative year-to-date returns, compared to approximately 11% for the Russell 1000 Growth Index. All S&P 500 sectors were in positive territory during the third quarter, with the exception of energy which posted a negative return of 19.7%. Over the trailing 12-month period the spread between the best and worst performing sectors widened (Technology +47% and Energy -45%).
Foreign equity markets also posted positive returns in the third quarter with the Developed and Emerging Markets indexes up 4.6% and 9.6%, respectively.
While equities provided a bumpier ride during the quarter, the bond market provided some stability with the U.S. Treasury yield curve basically unchanged, however, investment grade bonds on average yield rates below current inflation rates. Fixed income returns were modest during the quarter with the Barclays Aggregate Bond Index up 0.62%. Stable interest rates have kept mortgage rates low which has been a boon to the housing market.
Second quarter GDP fell 31.4% as the economy grappled managing increasing COVID cases, however, the advance estimate for the third quarter shows the U.S. economy growing 33.1% as businesses began to reopen and consumer activities resumed. The National Bureau of Economic Research (NBER) has concluded the recession started in February this year and marked the end of the expansion that began in June 2009. The expansion lasted 128 months, the longest in U.S. history going back to 1854.
The impact of the economic downturn due to the global pandemic has disproportionately hurt lower income workers with employment levels down 1% for the top income quartile and down 14% for the bottom quartile (annual income below $27,000). Extended unemployment benefits helped lessen the burden for those that lost their jobs and even increased savings and spending rates in those areas that have a lower cost of living.
During the third quarter the headline inflation measured by the Consumer Price Index grew at 1.4%, up from 0.60% the previous quarter. Major contributors to inflation growth over the past year are the indexes for food away from home and food at home which grew approximately 4% and used cars and trucks which grew around 10%. The energy index continued to decline led by falling oil prices along with apparel and transportation services.
