3rd Quarter 2020 Market Review
Thrivent Asset Management Contributors to this report: Mark Simenstad, CFA, Chief Investment Strategist; Steve Lowe, CFA, Vice President, Mutual Funds-Fixed Income; John Groton, Jr., CFA, Director of Administration and Materials & Energy Research; Matthew Finn, CFA, Head of Equity Mutual Funds; and Jeff Branstad, CFA, Senior Investment Product Manager
Even with a divisive presidential election on the horizon and COVID-19 maintaining a menacing grip on global commerce, the S&P 500® managed to reach a new all-time high in the 3rd quarter.
Although stocks retreated moderately in September, the S&P 500 index was still up more than 8% for the quarter and about 4% year-to-date – recovering from a 20% 1st quarter slide. In fact, the market even shrugged off the president’s virus diagnosis with a decline of less than 1% on the day the news was reported.
While the economy remains in a recession – with millions of people still unemployed from pandemic-related lay-offs – there have been signs of a recovery, with businesses across America reopening and the employment picture slowly brightening.
The strengthening economy is not the only factor contributing to the stock market rebound. An unprecedented stimulus effort by Congress and the Federal Reserve (Fed) to inject trillions of dollars into the economy has helped pump up the market’s performance. But the Fed policy has also driven bond yields to historic lows, with most government bonds paying less than 1%. (See: Market recovery: The beat goes on by Mark Simenstad, Chief Investment Strategist)
The S&P 500 Index was up 8.47% for the 3rd quarter – from 3,100.29 at the 2nd quarter close to 3,363.00 at the end of the 3rd quarter. The total return of the S&P 500 (including dividends) was up 8.93% for the quarter. However, the total return of the S&P 500 for the month of September was -3.80% as the market cooled off after reaching an all-time high. The high point of the market came on September 2 when it closed at 3,580.84. (The S&P 500 is a market-cap-weighted index that represents the average performance of a group of 500 large capitalization stocks.)
The NASDAQ Index continued to thrive in the 3rd quarter, up 11.02% for the three-month period. But, like the S&P 500, the NASDAQ experienced a September correction, down 5.16%. Year-to-date, the index was up 24.46%. (The NASDAQ – National Association of Securities Dealers Automated Quotations – is an electronic stock exchange with more than 3,300 company listings.)
With stores and restaurants reopening, retails sales have continued to pick up. According to the Department of Commerce retail report issued September 16, retail sales were up 0.6% in August from the previous month, and up 2.6% from August 2019.
Total sales for the June - August period were up 2.4% from the same period a year earlier. Automobile sales were up 0.2% from the previous month in August and up 4.5% from a year earlier. Home improvement projects during the pandemic have helped bolster the building materials and garden supplies category, with sales up 2.0% from the previous month and 15.7% from a year earlier. Food and drinking establishments have also continued to recover as customers slowly begin to return. Sales were up 4.7% for the month, but still down 15.4% from a year earlier. Department store sales continue to suffer, down 2.3% for the month and 16.9% from a year earlier. Non-store retailers (primarily online) have continued to benefit, with more consumers relying on the internet to make their purchases. Although there was no change in sales from July to August, monthly sales were up 22.4% from a year earlier.
The U.S. economy gained 661,000 jobs in September as businesses continued to open across the country. As a result, the unemployment rate dropped from 8.4% in August to 7.9% in September, according to the Department of Labor Employment Situation Report issued October 2. That was the fifth consecutive month that the unemployment rate has dropped, although the number of job gains in September was the lowest of the past five months.
While the trend in net job gains has been positive, the fall-out from the pandemic continues to affect the job market, with new unemployment claims averaging about 867,000 over the four-week period through September 26. That is down slightly from over one million new claims during the previous four-week period. According to the report, “notable job gains occurred in leisure and hospitality, in retail trade, in health care and social assistance, and in professional and business services. Employment in government declined over the month, mainly in state and local government education.” Average hourly earnings ticked up $0.02 in September, from $29.45 to $29.47.
Ten of the 11 sectors of the S&P 500 made gains in the 3rd quarter, led by the Consumer Discretionary sector, up 15.06%, Materials, up 13.31%, and Industrials, up 12.48%. Energy continues to lag the market, with oil prices still in the tank. The Energy sector was down 19.72% in the 3rd quarter and down 48.09% year-to-date.
The chart below shows the results of the 11 sectors for the past quarter and year-to-date:
The yield on 10-year U.S. Treasuries remained low but stable in the 3rd quarter after a steep drop in the 1st quarter. The yield was 0.68% at the end of the 3rd quarter, up slightly from 0.65% at the close of the 2nd quarter. It still remains significantly below the 2019 year-end rate of 1.92%. The historically low yield is attributed to two significant cuts in the Fed funds rate by the Fed in March designed to stimulate the economy shortly after the onset of the COVID-19 pandemic.
After falling sharply in the 2nd quarter amidst the pandemic,12-month forward corporate earnings projections for S&P 500 companies stabilized in the 3rd quarter as businesses began to reopen. For the 3rd quarter, earnings projections were up 2.03%, although they are still down 11.35% for the year.
After moving up significantly in the 2nd quarter as stock prices climbed, the forward S&P 500 price-earnings ratio (P/E) leveled off in the 3rd quarter. The P/E was 15.43 at the end of the 1st quarter and jumped to 21.72 at the end of the 2nd quarter – the highest level since 2002. However, in the 3rd quarter, as earnings began to recover, the P/E slipped slightly to 21.54, which is still high by historic standards.
The forward 12 months earnings yield for the S&P 500, which is the inverse of the P/E, ticked up 0.01% in the 3rd quarter, from 4.68% at the end of the 2nd quarter to 4.69% at the end of the 3rd quarter. That yield is still down significantly from the 6.60% yield at the end of the 1st quarter. The 12-month forward earnings yield can be helpful in comparing equity earnings yields with current bond yields. The current yield remains significantly higher than the 0.68% rate of 10-year U.S. Treasuries.
The dollar gained 4.41% versus the Euro during the 3rd quarter, although it declined 1.95% versus the Euro during September. Year-to-date, the dollar has moved up 4.47% versus the Euro. The dollar was down 2.18% versus the Japanese Yen in the 3rd quarter, and down 2.89% versus the Yen for the year.
Oil prices have remained at extremely low levels as travel by auto and air around the world remains at sluggish levels. West Texas Intermediate, a grade of crude oil used as a benchmark in oil pricing, edged up 2.47% in the 3rd quarter from $39.27 at close of the 2nd quarter to $40.22 at the end of September. The price is still down 34.13% from the close of 2019.
After surging earlier in the year, gold prices dropped 4.20% in September, but still posted a 5.28% gain for the 3rd quarter. Gold prices are up 24.45% for the year, closing the 3rd quarter at $1,895.00.
International equities continued to recover in the 3rd quarter. The MSCI EAFE Index, which tracks developed-economy stocks in Europe, Asia and Australia, was up 4.20% in the 3rd quarter even after experiencing a slight decline of 2.25% in September. Through the first nine months of 2020, the index is still down 8.92%.
What’s ahead for the economy? See the 4th Quarter Market Outlook: Market recovery: The beat goes on by Mark Simenstad, Chief Investment Strategist
Media contact: Samantha Mehrotra, 612-844-4197; samantha.mehrotra@thrivent.com
All information and representations herein are as of 10/06/2020, unless otherwise noted.
The views expressed are as of the date given, may change as market or other conditions change, and may differ from views expressed by other Thrivent Asset Management, LLC associates. Actual investment decisions made by Thrivent Asset Management, LLC will not necessarily reflect the views expressed. This information should not be considered investment advice or a recommendation of any particular security, strategy or product. Investment decisions should always be made based on an investor's specific financial needs, objectives, goals, time horizon, and risk tolerance.
Any indexes shown are unmanaged and do not reflect the typical costs of investing. Investors cannot invest directly in an index.
Past performance is not necessarily indicative of future results.
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