3Q 2020 Market Summary
The S&P 500 Index has shown admirable resilience since the virus-related bottom in March, but much of the index’s returns have come from just a handful of companies. In fact, the top five companies in the S&P 500 now make up 23% of the index’s total value compared to only 12% just three years ago. This concentration amongst the largest companies masks the struggles of many smaller companies. While the S&P 500 is up 5.6% year-to-date through September, the median stock in the S&P 500 index is down almost 3.5% with small cap and non-U.S. stocks also still in the red for 2020. We believe this divergence provides opportunities for contrarian investors.
We expect continued volatility in the near-term. Significant uncertainty remains around the outcome of upcoming elections and the impact, if any, those elections will have on important economic drivers like tax rates and global trade relations. Ongoing negotiations for additional fiscal relief may also swing investor sentiment on a day-to-day, or even hour-by-hour basis.
Further, the Covid-19 virus remains a threat to the economy. For that reason, we emphasize the importance of a long-term perspective and reliance on fundamentals and valuation, rather than news headlines that create short-term volatility.
Equities continued their rebound during the third quarter of 2020. The S&P 500 returned 8.9% for the past quarter, even after declining 3.8% in September. Large growth stocks continued to lead the way, with the Russell 1000 Growth Index returning 13.2% compared to 5.6% for the Russell 1000 Value Index.
Small and mid-sized companies also posted positive returns last quarter, though continue to lag the larger-company S&P 500. The Russell 2000 Index of smaller companies returned 4.9% and the Russell Mid-Cap Index returned 7.5% over the last three months. Almost every sector posted positive returns last quarter, except for the struggling energy sector which declined another 19.5%.
Non-U.S. companies also held their own during the quarter with the MSCI EAFE Index up 4.8%. The MSCI Emerging Market Index returned 9.6% during the quarter, led in large part by China, which makes up 40% of that index. The MSCI China Index generated a 12.5% return last quarter.
Most interest rates nudged slightly lower during the quarter, leading to modest gains for fixed income asset classes. The Federal Reserve recently implied a willingness to let inflation run above its 2% target, suggesting that rates could remain low for quite some time.
As a result, short-term Treasury rates declined anywhere from 0.03% to 0.05%, while longer-term 30-year Treasury rates increased 0.04% to 1.45% at the end of the quarter. The Bloomberg Barclays U.S. Aggregate Bond Index returned 0.6% over the past three months.
Corporate bonds also held up well during the quarter, supported by the ongoing economic recovery. Investment grade bonds, measured by the Bloomberg Barclays U.S. Corporate Bond Index returned 1.5% last quarter, while Bloomberg’s index of high yield bonds returned 4.6%.
The Bloomberg Commodity Index gained 9.1% during the quarter of 2020. Gold prices also continued their upward climb with the Dow Jones Commodity Gold Index returning 3.6%. Investors have flocked to gold bullion over the past twelve months due in large part to economic uncertainty and to hedge inflation risk that may arise due to massive global monetary stimulus. Oil prices were volatile during the quarter, but ended the three-month period flat around $40 per barrel of West Texas Intermediate crude oil.