2020 continues to be a year of surprises. In spite of persistent and serious worldwide issues related to COVID-19, financial markets around the world generally continued to improve in the third quarter. Almost all economic and market indicators pointed to positive trends, although there were signs of slowing as the quarter ended.
The three months ending September 30 produced the second consecutive quarter of strong stock market returns. The S&P 500, measuring large U.S. stocks, rose by 8.93%, and the Russell 2000 (small U.S. companies) by 4.93%. Foreign markets showed similar results, with the MSCI EM Index (emerging markets) gaining 9.56% and MSCI World ex US (international developed) climbing 4.92%.
Yields on the U.S. 10-year treasury remained practically unchanged, ending the quarter at 0.64%. The expectation for future rate levels remained subdued – the 30-year U.S. Treasury bond yielded a low 1.64% at quarter-end. Municipal bonds posted a strong quarter, with the Bloomberg Barclays Index gaining 1.23%.
Inflation remains tame, with U.S. CPI reflecting a 1.3% annual rate, still well below the Federal Reserve Board’s 2% target. In light of the low inflation rate, and to continue to provide a supportive monetary policy for the virus-shocked U.S. economy, the Federal Open Market Committee voted to maintain the federal funds rates at 0.00-0.25% following their September meeting. They expect to hold rates at this level until labor markets recover and inflation shows signs of firming.
Crude oil prices (West Texas Intermediate) rose slightly, closing at $40.22/barrel as of September 30 vs. the second quarter close price of $39.27. The U.S. dollar declined against every major currency in the quarter. This, coupled with strong demand as a safe haven in times of stress, led to the price of gold continuing to climb –ending the quarter at $1,770, about 5% higher than the previous quarter close.
Economic indicators mostly pointed in a positive direction. The U.S. unemployment rate continued to fall, starting the third quarter at 11.1% and ending at 7.9% after peaking during the pandemic crunch at 14.7%. Latest reports for November show the current unemployment rate at 6.7%, with total nonfarm payroll employment increasing 245,000 from the previous month.
Manufacturing measured by the Purchasing Managers’ Index (PMI) ended the quarter at 55.4 (anything over 50 is growth) and the services sector was even stronger, closing at 57.8. The trailing measure of Gross Domestic Product (GDP) is estimated by JP Morgan to have declined by over 10% peak to trough, making this the third-worst recession in history, but expectations are high for a return to positive numbers as the economy reopens and output improves.
Though markets across the globe have felt some relief following the U.S. presidential election and the imminent launch of coronavirus vaccines, challenges still remain. Despite much positive recent news, we are not out of the woods yet – expect more near-term volatility as the sentiment and news ebbs and flows.
As always, please call us to address your questions, and make sure to apprise your advisor of any changes to your financial situation.