Q3 2020 Market Commentary – Oct 12, 2020

In many ways, this recession and the recovery to date has been the most uneven one ever recorded.  Housing data, corporate profits, unemployment figures, and stock market returns mask the fact that while many sectors of the economy have rebounded strongly (or, in the case of housing prices, were hardly impacted in the first place), large parts of the economy are still seeing depression-level declines.

In terms of jobs, skilled workers and more highly paid workers have already recouped their setbacks, while lower skilled and lower wage workers are still struggling.  In September, the overall unemployment rate had declined to 7.9% (from a peak of 14.7% in April).  However the employment rate of high wage workers (those earning over $28 per hour) was up 1.2% from February to August, while low wage worker employment (those earning less than $16 per hour) was down 26.9% for the same period.  Unlike the 2008 recession, which saw investment bankers losing their jobs alongside front-line workers, the nature of the pandemic means that job losses have been concentrated in areas like retail, hotels, and restaurants, which employ a large number of lower-wage workers.

The contrast is also clear among businesses.  On “Wall Street”, the stock market has largely recovered (although large company stocks have done better than small company stocks).  On “Main Street”, on the other hand, the situation remains very serious.  The Federal Reserve Bank of New York has said that the number of active business owners fell by 22% from February to April 2020 – the largest drop on record. 

Investors often confuse the stock market and the overall economy.  2020 was another example where the stock market has not reflected the overall economy very accurately, in this case to the benefit of those holding public equities and to the detriment of many workers in the service sector.


In the third quarter, stock markets continued their rebound from March lows.  July and August both saw strong gains as progress continued toward a COVID-19 vaccine.  Markets fell back a bit in September, as gains seemed a bit overdone and economic improvement slowed.

In the third quarter US stocks outperformed broad international stock indexes.  The Russell 1000 index of US large company stocks had a total return (price and dividends) of 9.5% for the quarter.  Small cap stocks lagged their larger counterparts, as the Russell 2000 index of US small company stocks gained 5.6% in total return.  International stocks also rose, as developed country stocks picked up 4.8% while emerging country stocks were the highlight outside of the US, gaining 9.6%, with Chinese stocks in particular adding to year to date gains.


Bonds have provided steady returns this year as rates have declined.  In the first half of the year, the broad-based Bloomberg Barclays US Aggregate Bond Index was up 6.1%, and it added a modest additional gain of 0.6% in the third quarter.  Inflation-protected bonds saw stronger gains in the quarter, rising 3.0% as measured by the Bloomberg Barclays TIPS Index. 

Looking ahead, however, rates have gotten so low that investors are receiving very little yield, and further gains from rate declines are likely limited at this stage.  Government bond interest rates declined sharply in the first quarter and have been largely unchanged since, with the 10-year Treasury holding steady at around 0.7%. 

Corporate bonds continued to indicate a calming trend since the crisis.  The riskiest high yield bonds started the year trading at just 3.5% higher than government treasuries and then spiked up to more than 10% higher in late March, but now have come back down to a little over 5% higher than treasuries.

The Federal Reserve deserves a lot of credit for having backstopped the financial system early on in the crisis, and there is broad agreement that it helped to prevent a more serious downturn.  Still, after reducing interest rates to near zero and after its lending programs have reached roughly $3 trillion, it does not have many tools left to stimulate demand and get people back to work.  We’ll need Congress to step in with more stimulus to speed that up, and as of this writing another stimulus package appears to be stalled in Congress. 


Gold has traditionally been a “safe haven” asset during rocky times.  It is the only commodity held in our portfolios, as a hedge against inflation surprises and against sharp falls in stock prices.  Interestingly, the price of gold has risen every quarter this year and it has been our best-performing asset class.  It has steadily increased whether markets were rising or falling.  We expect that at some point it will go back to being more volatile, but for now global demand for this safe haven has continued to grow.  The price of gold rose 6.7% again in the third quarter, after rising 6.2% in the first quarter and 9.9% in the second quarter.

Other commodities have done much less well – particularly those whose usage is related to economic production.  The broad-based S&P GSCI Commodity Index was still down over 33% year to date through September 30th, despite being slightly positive in the third quarter.  Oil prices, as measured by the spot price of Brent Crude Oil, saw little recovery in the third quarter, rising from $41.27 per barrel on June 30th to $42.30 on September 30th.  They started the year at over $66 per barrel.

Looking Ahead

Markets, like the economy, have been more divergent this year than in we’ve seen in a long time.  Large company US stocks, bonds, and gold have done well, while international stocks, smaller company stocks, and most other commodities have done far worse.  This has led to large US stocks becoming increasingly more expensive relative to smaller stocks and international stocks, a trend that we expect to regress to the mean over the longer run.

Election day is November 3rd, 2020.  FiveThirtyEight.com, the political website run by statistician Nate Silver which aggregates polling data, gives Joe Biden a more than 80% chance of winning as of this writing.  It also predicts (with much less certainty) that Democrats could take over the Senate. 

Although many believe that markets fare better under Republican administrations than Democratic ones, the historical data is not very clear on this, and it’s exceedingly difficult to predict market reactions to elections (recall the global market whip-sawing that we saw in 2016 in the first 24 hours after the election results).  A Democratic sweep scenario this time around might lead to at least partial reversal of 2018’s tax cuts, but it would also likely lead to stronger fiscal stimulus and a reversal of Trump’s immigration and trade policies, which could lead to faster economic growth.  For more on the impact of various election scenarios, please see our recent blog post entitled “Parsing the Policies – What if One Party Sweeps the Election?” on our website.

2020 has already been a year of significant volatility, especially after a long period of market calm, and it remains to be seen what the final quarter brings – politically and otherwise.  We believe that keeping an eye on the longer term and staying invested in the global markets will enable you to weather the short term volatility and allow longer term underlying economic growth, not short term predictions, to drive your returns.