The last week’s market highlights:
Each week, we present our featured topics in the context of the major themes listed below from Nuveen’s 2020 Midyear Outlook:
- U.S. economy: Looking for a full recovery by late 2021, albeit with high unemployment.
- Global economy: More monetary and fiscal stimulus is needed to keep businesses afloat.
- Policy watch: No Fed interest rate hikes until well after the economy has healed.
- Fixed income: Lean into higher-risk assets to generate income.
- Equities: Focusing on quality across the board (and dividend payers, too).
- Asset allocation: Consider benefits of active management amid idiosyncratic opportunities.
Quote of the week:
“If you want to lift yourself up, lift up somebody else.” — Booker T. Washington
President Trump coronavirus news: Investors should stay the course, focus on fundamentals
On Friday morning, the U.S. awoke to news that President Trump and the first lady had tested positive for the coronavirus.
Most importantly, we wish them both a smooth and rapid recovery. As we have maintained all year, the economic and financial implications of this disease run a distant second to the terrible human cost it has exacted across the world.
It would be irresponsible of us to speculate on the president’s health beyond what little we know, or on what implications it might have for the November election.
Friday trading was orderly across fixed income and equity markets, with a moderate flight to safety following the news overnight and the disappointing U.S. employment report, which we discuss below. Futures markets are telling us that investors now anticipate equity market volatility will be even higher over the next several months, but we expected that already amid the possibility of a delay in the election results.
Presidential elections don’t have a history of being decisive or durable drivers of financial markets. Given that, and especially in light of the additional uncertainty brought on by the president’s test results, we suggest investors refrain from making significant changes to their asset allocations or overall wealth strategies in advance of, or following, the November elections.
The key point on this front: Regardless of which party controls the White House or Congress, the main determinant of investors’ long-term returns will be their own asset allocation decisions. While policy changes following the election could affect the economy and company profits, market activity over the next year seems likelier to be driven by progress toward one or more coronavirus vaccines and their availability to the public at large.
The Federal Reserve also seems likely to renew its dedication to accommodative monetary policy regardless of who wins the presidency. This means investors whose financial goals include generating a reliable cash flow from their assets will remain challenged.
Uncertainty makes for an uncomfortable investing environment. But investors need not go it alone. Now might be a particularly good time to have a conversation with a financial professional about your financial plan and how it’s affected by events like the election and the pandemic.
If 2020 has provided us with any positive lesson, it’s that staying the course even in the choppiest of waters can often be the right decision.
Understandably, September’s jobs report takes a back seat
September’s payroll data, released on Friday, was genuinely disappointing—the worst employment report since April’s devastating meltdown.
At first glance, the numbers don’t look so bad:
- Private-sector job creation (877,000) topped forecasts.3
- The headline unemployment rate fell from 8.4% to 7.9%.4
- The number of temporarily laid off workers declined.5
But on further review, we note several discouraging points:
- The addition of 661,000 jobs badly missed forecasts of around 800,000, due in large part to layoffs from public-sector jobs, including those related to U.S. census data collection.6 Another factor: states, cities and towns facing budget crunches were forced to trim headcount.
- September’s falling unemployment rate—normally a positive—was partly because of a 695,000 decline in the size of the U.S. labor force.7
- The labor force participation rate for prime-age workers edged down from 81.4% to 80.9%.8 To some extent, this slip maybe attributed to parents being forced to stay home to care for children unable to return to school. We’ve referred to a falling participation rate as a “parking brake” of sorts on both short- and long-term U.S. economic growth—and that’s how it’s acting now.
The bottom line(s): The pace of hiring has undoubtedly slowed from the summer months, with over 12.5 million workers still classified as unemployed.9 And the scars suffered by the labor market have hardened—the number of people permanently laid off (versus temporarily furloughed) has nearly doubled since April, from 2 million to almost 3.8 million.10
Recapping a very good quarter for investors
The third quarter of 2020 is in the books, and it was one that offered something for everyone seeking positive investment returns. Every major asset class outperformed cash, which returned just 0.5% for the period.11 And with the Fed likely to keep its “lower-for-even-longer” interest-rate policy in place until at least 2022, we doubt cash will offer much more in the coming years.
Some performance highlights for the quarter:
- It paid to “stock up” on U.S. equities. The S&P 500 Index followed up its 20.5% second-quarter surge with a hefty 8.9% return in the third.12 Gains were realized in July (+5.6%) and August (+7.2%), propelling the index to a series of record highs midway through the quarter.13 Investors cheered (1) large, frequent upside surprises to global economic data; (2) consensus-topping second-quarter corporate earnings; (3) apparent progress toward a COVID-19 vaccine and (4) expectations for further monetary and fiscal stimulus. But the rally stalled in September (-3.8%), largely because Congress failed to renew key parts of the CARES Act intended to support household and business incomes.14 That failure led to downgraded forecasts for U.S. consumer demand over the next several quarters.
All but one of the S&P 500’s 11 sectors advanced for the quarter as a whole. Consumer discretionary (+15.1%) led the pack, followed by materials (+13.3%) and industrials (+12.5%). Only energy (-19.7%) lost ground. In our view, the profit outlook for energy is the worst of any S&P 500 sector, given the 40% decline in oil prices since January. Based on respective Russell indexes, bigger was better: large caps (+9.5%) outpaced mid caps (+7.5%) and small caps (+4.9%). Growth stocks (+12.9%) continued to dominate value shares (+5.4%).15
- A declining dollar helped non-U.S. stocks. International equities posted mostly positive results. Based on MSCI indexes in local currency terms, emerging market stocks (+8.7%) easily outperformed their developed-market counterparts (+1.2%). Because non-U.S. currencies strengthened against the U.S. dollar during the quarter, those gains improved to 9.6% and 4.8%, respectively, when translated into dollars. Eurozone equities (-0.2% in local currency terms) slipped as the region’s economic recovery slowed in September amid rising COVID-19 infections that triggered a renewed downturn of service-sector activity in many eurozone countries.16
- Bond market performance favored higher-risk sectors. Thanks to continued ultra-low bond yields, the broad investment-grade fixed income market returned just 0.6%. In contrast, riskier non-Treasury “plus” sectors such as high-yield corporates (+4.6%), senior loans (+4.1%) and emerging market debt (+2.4%) all delivered solid results.17
To sum up: the third quarter easily exceeded our expectations and rewarded diversified investors handsomely for sticking with their long-term investment strategies. That’s a course of action we continue to recommend, especially with volatility likely to pick up in the wake of the president’s testing positive for COVID-19 less than one month before the election.