Just from looking at the performance of the S&P 500, one would think that 2020 has been an almost normal year for capital markets. Unfortunately, the S&P 500 distorts the underlying weaknesses shown by the vast majority of stocks around the world; almost every other asset class sub-sector around the world is lagging with negative year-to-date returns.
The global pandemic has disrupted economic activity such that a new paradigm of winners and losers has emerged. Normally conservative sectors like financials, energy, and utilities have struggled with weak performance while a handful of large cap technology growth stocks lead the broad markets higher. Then, factor in troubling geopolitical and social issues during an election year combined with an over-accommodative Fed and one has a recipe for volatility. The table below shows the relative performance of the major asset classes through 2020 Q3.
Q3 showed a continued attempt at a rebound from the carnage of Q1. The S&P 500 (IVV) was up a strong 9.02%, but other broad equity markets continued to trail including small cap (SCHA) 5.01%, international developed markets (SCHF) 5.55%, and real estate investment trusts (SCHH) 1.15%. High dividend equities (DVY, SCHD, SPHD) continued to suffer during Q3, as well, with much worse performance due to concerns about dividend cuts. Some diversifying exposures did outperform, including momentum (MTUM) +12.71%, but those were the rare exceptions.
The bond markets continued to show strength, consistent with Fed support of investment grade and non-investment grade corporate bonds. Broad core bonds (SCHZ) were up +0.31% quarter-to-date, led by U.S. treasury exposures, and credit exposures recovered as investment grade corporate bonds (LQD) generated a +0.82% return. High yield bonds (HYG) continued to recover from a very weak Q1 return with a Q3 return of 4.05%.
As I wrote on my blog post “De-Worsification” on August 20:
Some people in the industry talk about “de-worsification”, instead of “diversification”, as a situation where a broad collection of holdings actually hurts total portfolio performance. This is certainly what we have seen this year. We do not expect this situation to continue, of course, since excesses in the broad markets (both positive and negative) always revert to the mean over time. The only question is timing.