Many have said that 2020 has been an unprecedented year. The spread of the pandemic led to a global lock-down, accompanied by a dramatic sell-off in risk assets around the world. Then just weeks into the decline, another surprising thing occurred – global markets mounted a powerful advance. Fueled by accommodative monetary policy, businesses and people had strong resolve to adapt and move forward. As American poet Robert Frost once wrote, “The best way out is through.”
The market’s advance, like the global economies, has been uneven and halting at times. While the experts and pundits were calling for the next shoe to drop, it hasn’t yet. To the surprise of many, the third quarter was more of the same. U.S. markets continued the recovery building on the gains of the second quarter. What’s more, gains over the past two quarters capped the strongest two-quarter consecutive return since the Great Recession recovery in 2009.
Investors still have understandable concerns despite the encouraging gains. Some have noted the stock market and the economy have become detached from each other. It’s important to note that while the economy captures the immediate situation, investment markets attempt to project a value beyond the present. So, perhaps there isn’t a disconnect; they are just measuring different things.
As mathematically based investors and students of the markets, we don’t just accept what the markets give us during periods of strong performance and call it a day. We examine powerful recoveries with the same vigor as bruising declines.
One thing we are certainly aware of is that much of the recovery in the equity markets has come from large technology names. While the Dow Jones Industrial Average is up more than 26% since March, the Nasdaq, which is an index heavy in tech names, raced to a 45% gain over the last six months.
Given the impact of the pandemic, it is not surprising that there would be differences in the gains for these two indices. Companies that provide vital technology, communication and medical diagnostics saw surges in demand. Whereas, companies in other sectors like transportation, finance and manufacturing have seen continued weakness.
We aren’t sounding an alarm. Unlike the Dot-Com boom and bust, most of these companies provide services that are useful, even vital, and have actual earnings. However, we are aware that market cycles are called cycles for a reason, so we examine portfolios accordingly.
Another challenge we sometimes face is the fear of “missing out” when there is disparity of returns among different sectors and indices. Some may think about snapping up the sectors and markets that have appreciated the most, while dumping the rest. This approach is sometimes referred to as “the trend is your friend” investment strategy. The problem with this approach is that market history has shown momentum is your friend, right up until it isn’t.
While we are aware of index benchmarks in comparison to portfolios, and are happy to discuss them, our approach is a little different. We believe in diversified portfolios that support a goal-based outcome. Your real benchmark is your risk-aware return and how it relates to your most-important goals, like a secure retirement and providing for your heirs and charities.
A Look at the Markets
Domestic Equities: U.S. stocks continued their strong comeback in the third quarter. The S&P 500 extended the gains from the second quarter, jumping 8.9%. This brings the index into the positive for the calendar year with a 5.6% gain. Returns across smaller stocks were more subdued. The Russell 2000 rose 4.9% for the quarter but remains down 8.7% for 2020.
International Equities: Foreign stocks also turned in positive returns. The International Developed Index increased 4.8% for the quarter, but still shows a 7.1% decline for the year. This relative underperformance is likely due to both currency fluctuations and a smaller weighting in technology shares than the U.S. Still, we believe that for diversification over time, international stocks deserve a place in a diversified portfolio. Emerging Markets managed a stronger recovery due to decreased trade tensions and increased 9.6% for the quarter. This brings the 2020 return close to even with a 1.2% loss year to date.
Fixed Income: As the flight to safety caused by the pandemic waned, returns in the bond markets cooled from the surge in the second quarter. The Barclays Aggregate, a measure of the total bond market weighted toward Treasury securities, edged up 0.6% for the quarter and a strong 6.8% for 2020.
Another issue that has investors on edge is the contentious political environment, now with the elections just around the corner. People rightfully feel strongly about politics and the future of our country. But it is important to remember that whatever the outcome, investing can be a decades-long process. Presidents come and go, but the power of prudent and disciplined investing remains. We will be there to help, irrespective of the party in power.
Are the events and market movements of 2020 really that unprecedented? Probably not. Market declines come swiftly and often. Many times, they come from threats that were previously unknown. Likewise, recoveries often come quickly and powerfully, defying the skeptics. Markets have always been this way and likely always will be.
We believe our process of building portfolios in a goals-based and disciplined way is powerful, but we know there is more to it than that. There are people attached to the assets we oversee. We are always here to discuss the markets and listen to your goals and circumstances. Let us know if you would like to talk.