3rd Quarter 2020 Market Commentary, “Despite Uncertainty Around U.S. Election and Hard Brexit, Hope Springs Eternal for COVID-19 Vaccine and Government Relief”

Data Source: Bloomberg

To read full commentary, click here.

September 2020 Highlights:

  • Market action during the third quarter was largely uneventful despite a moderate pickup in volatility and a ‘pause’ in the global reflation trade.
  • Global markets pulled back from a torrid pace set throughout July and August. MSCI All-Country World Index (ACWI) was down 3.2% for the month with Japan (-1.0%), Emerging Markets (-1.6%), and Asia Pacific ex Japan (-2.3%) leading major regions followed by Europe (-3.3%) and the U.S. (S&P 500 -3.8%).
  • The first two months saw rallies in the global reflation trade only to see investors back away from this trade in September due to technical reasons and diminishing prospects over a second U.S. pandemic relief spending program as well as rising prospects over Hard Brexit.
  • The U.S. market, led by large cap growth technology stocks, led global markets but then pulled back following reports of a technical unwinding of call option positioning and dealer hedging.
  • Japan equities rallied following reports of Warren Buffett’s Berkshire Hathaway purchase of Japanese trading companies (value play) despite the unexpected resignation of prime minister Shinzo Abe due to chronic health problems.
  • Europe lagged due to rising risks of a hard BREXIT as prospects for a post-Brexit trade deal were threatened with UK Parliament’s passage of a bill targeting the Northern Ireland/Irish border.
  • S. Pure Value returned -3.7% versus -2.6% for Pure Growth as large cap technology stocks recovered some of the early month sell-off. U.S. small caps.  The S&P 500 (large caps) returned negative 3.8% outperforming the S&P 600 (small caps) which returned -4.7%.
  • This month saw Defensive sectors such as utilities, staples, and healthcare outperform as did traditional cyclicals such as materials and industrials while growth technology lagged as did the energy sector, dragged down by a sell-off in oil prices.
  • Among factors, Minimum Volatility, Value and High Dividend outperformed Momentum and High Quality. Minimum Volatility, High Dividend, and Value benefited from some rotation away from Momentum, which is predominantly growth technology.
  • Investment grade fixed income posted a slightly negative return hurt by a wider credit spreads and modest interest rate volatility. The U.S. Bloomberg/Barclays Aggregate Index returned -0.1% for the month. The 10-Year U.S. Treasury yield has settled into a narrow range of 0.60-0.70%.
  • U.S. High Yield was affected by the negative equity performance, returning -1.0% for the month, as high yield spreads widened above 5% after hitting an intra-quarter low of around 4.5%. Non-U.S. dollar and emerging market debt were hurt by the strengthening U.S. dollar.
  • Among equity alternatives, U.S. REITs returned -2.3% for the month after having risen d2% earlier in the month, while commodities and precious metals sold off. Precious metals came under pressure as negative real interest rates appear to have a reached a floor, while commodities were hurt by pullback in oil prices over concerns of waning demand and OPEC overproduction.

To read full commentary, click here.

By: Benjamin Lavine