We will be talking about 2020 for a LONG time! It is hard to believe that the capital markets have recovered so strongly in the face of “the worst event this country will face” per Dr. Birx, White House Health Advisor. But, there are plenty of reasons for the positive market response, including the points I reviewed back on October 15 from a Wellington Management piece titled, titled Politics, Policy and the Pandemic (click link for more info).
As I said back in October, “In summary, the authors state that there are three main factors leading the way. First, even though there have been some bumps along the road, we are moving in the right direction regarding COVID-19. Treatments and vaccines are moving forward and there is reason to view this as a positive trend. Secondly, there has been strong fiscal and monetary support to bridge the economy over this crisis and more is hopefully coming. And thirdly, economies are opening slowly and there does not seem to be a prospect for another shutdown.”
Since September 30, we have seen multiple new market highs and a rotation away from previous market leaders to new sectors that had previously lagged. Which sectors have started a market recovery and which sectors have paused (or lost steam?)
From the table below we can see some dramatic swings. The S&P 500 (IVV) continues to show strength with a Q3 QTD return of 10.45% and an impressive YTD return of 16.56%. But, the previously lagging sectors like small cap, mid cap, and high dividend are outpacing the S&P during Q3 with outsized returns of 25.75%, 20.60%, and 19.62%, respectively. On the other hand, previous market winners like the momentum stocks (MTUM), are lagging Q3 QTD with a 6.43% return, but still strong YTD with a 26.06% return.
Bonds, meanwhile, have achieved as much return as they can in this market with not much upside left. YTD through September 30, aggregate and investment grade bonds performed well due to extraordinary efforts led by the Fed and fiscal policy. Q3 QTD, however, has shown a flip flop. Aggregate bond returns have stalled during Q3 as Treasury yields touched all-time lows, while corporate and high yield markets continued to benefit from spread compression due to Fed actions. Going forward, as I have written at length, the Treasury bond market has “mathematically” topped out; the only likely return in bonds is from “spread” product.
Short term market dislocations will always emerge as the economy rotates from despair to exuberance. Some sectors will outperform while others lag. For long term investors, it is important to stay the course and let the market sort itself out over time. For short term or conservative investors with a potential need for a stable portfolio to fund expenses and other outflows, the benefits of a long term focus are foregone, but replaced by a conservative portfolio that better reflects the investors risk profile and risk tolerance.