EQM Capital LLC 3Q 2020 Market Review – Looking Ahead to a Post-Pandemic Future

Posted on Oct 4, 2020

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Despite a rocky September, U.S. stocks ended the third quarter on a high note, posting a second consecutive quarterly gain of 8.9%, leaving the S&P 500 Total Return Index up 5.6% for the year.  Small cap stocks also rallied 4.9% in Q3, but lag large cap peers YTD, remaining down 8.7% for the year. Markets have been resilient despite the maelstrom of uncertainty surrounding the COVID-19 pandemic, economic stimulus, and the upcoming election. 

Market Headwinds

The global pandemic death toll stands at 1 million worldwide.  Our own President has fallen victim to the virus. While the nation has regained nearly half of the jobs lost to the pandemic, women have been disproportionately impacted, as more than 860,000 dropped out of the labor force in September to support caregiving and education in their households. The economic damage to the overall economy last quarter was a negative hit, according to the Bureau of Economic Analysis, of 31.4% to GDP with many segments of the economy still in recession territory such as airlines, entertainment, and energy. 

And yet the market remains in record territory.  Why?

Market Tailwinds

Past economic stimulus, the Fed’s zero interest rate policy, and the promise of another federal relief package have kept expectations for a recovery positive.  But beyond that, while many sectors have been disadvantaged in the COVID economy, others have benefited from it in a big way.  Health Care and “stay at home” and “work from home” stocks have been obvious beneficiaries. Ecommerce sales in 2Q were up 44.5% year-over-year as consumers increasingly prefer to shop online. The tech-heavy NASDAQ Composite enjoyed a dizzying run of almost 20% in September, but lost some ground and ended up 11.2% for the quarter. The housing market has also surprised to the upside thanks to limited inventory, favorable mortgage rates, and more people working from home and/or relocating. 

International Rebound More Muted

Investor optimism has rebounded with greater vigor in the U.S. than around the rest of the world, especially as compared to Europe where the economic contraction was the most pronounced.  A spike in cases in Europe is raising concerns about a second wave of pandemic shutdowns and curbing investor enthusiasm. The MSCI EAFE Index of developed market countries was up 4.8% in the quarter, but remains down 7.1% for the year.  Emerging Markets rallied 9.6% in Q3, but are still down 1.2% YTD.

Growth Significantly Outpacing Value

Globally, growth continues to be rewarded over value, with a rolling 12-month performance between the MSCI Global Growth and MSCI Global Value Index climbing to a historical gap of 40% as seen in the chart below. 

Source: Bloomberg, EQM Indexes LLC. Rolling 12-month return of MSCI Growth versus MSCI Value Index as of 9/30/20. It is not possible to invest directly in an index.

The pandemic has become a transformational event capable of resetting the entire economy.  Old paradigm business models will be destroyed in favor of new disruptive growth themes.  One such change is the transition from the physical to virtual world which is occurring globally across many different sectors and industries.

Source: EQM Indexes LLC. All rights reserved.

Furthermore, remote work is expected to create permanent geographic dislocations and the disruption of many industries.   

Prospects for Fourth Quarter

Looking ahead to the end of the year, LPL Financial Ryan Detrick’s research reveals that when the historically weak third quarter is up a lot (>7.5%), the S&P 500 Index has gained every single Q4, up 11 out of 11 times with an average return of 7.3%.

Why has the U.S. stock market has remained amazingly resilient, almost defying logic? Yes, an abundance of liquidity has helped, but it also looking forward to the silver lining.  The negative toll on our lives and freedom has been palpable, but it appears temporary in duration.  Investors are looking ahead to a post-pandemic world favoring technology, science, flexibility, mobility, and economic possibility.  Right now we may be wearing masks (or we should be), but on the other side of this, the future is so bright we may have to wear shades.[1] 

Disclosure

The opinions expressed above should not be construed as investment advice. This commentary is not tailored to specific investment objectives. Reliance on this information for the purpose of buying the securities to which this information relates may expose a person to significant risk. The information contained in this article is not intended to make any offer, inducement, invitation or commitment to purchase, subscribe to, provide or sell any securities, service or product or to provide any recommendations on which one should rely for financial, securities, investment or other advice or to take any decision. Readers are encouraged to seek individual advice from their personal, financial, legal and other advisers before making any investment or financial decisions or purchasing any financial, securities or investment related service or product. Information provided, whether charts or any other statements regarding market, real estate or other financial information, is obtained from sources, which we and our suppliers believe reliable, but we do not warrant or guarantee the timeliness or accuracy of this information. Nothing in this commentary should be interpreted to state or imply that past results are an indication of future performance.


[1] Song: Timbuk3 – “The Future’s So Bright,” 1986.