The stock market continued to rally sharply during the 3rd quarter from the lows set in late March. The benchmark S&P 500 hit an all-time high in early September on substantially better than expected corporate earnings before entering a consolidation phase that is part of healthy markets. After a sustained move in one direction, it’s common for market participants to take a collective breath to reassess valuations and forward-looking investment themes. The S&P 500 is 8.5% higher than at the end of June. Much work remains to be done in getting the U.S. economy back on pre-Covid footing, but observers rightly point to much progress made during the three months ended September 30th. That positive economic traction validates the observed higher equity prices and a constructive outlook moving into 2020’s final quarter.
The finally tally on 2nd quarter G.D.P. showed economic activity fell an eye-popping 31.7% on an annualized basis. However, economists estimate the U.S. economy grew by an annualized 25% during the 3rd quarter, as readings in manufacturing and service industries showed activity snapping back above pre-Covid levels. Forecasters anticipate that strong, though less robust, growth will continue in the 4th quarter and into 2021 with a multi-quarter stretch of 4+% growth. Pent-up consumer demand and a high savings rate could lead to strong holiday sales to close 2020. While unemployment remains lamentably high at roughly 8% of the workforce, 11 million jobs have been created since April. That figure represents almost half the jobs lost to virus-driven shutdowns. With mortgage interest rates at historic lows, the housing market has been extremely strong. August saw new home sales pass the one million mark for the first time since 2006. We’re on a long road to full economic recovery, but the pendulum has shifted in the right direction.
The stock market reflected the 3rd quarter’s economic bounce with cyclical sectors leading the way. Consumer Discretionary outpaced Consumer Staples as investors shifted from a stay-at-home mentality. Materials and Industrials performed strongly as the prospect of a sustained economic recovery has begun to look more like a base case scenario. Information Technology continued to perform fairly well as remote work and the accompanying technology needs look increasingly set to become part of a “new normal” for many industries. Technology companies also benefit from the secular tailwinds of 5G connectivity and a digital transformation across many industries. Communications Services turned in strong performance as “on line” becomes a more permanent part of life and new streaming entertainment options hit the market. Financials continue to lag in a low interest rate environment with little impetus for rates to rise. Traditional Energy sector companies continue to trail the market by a sizeable margin as fuel demand remains weak and an increasing focus on renewable energy takes hold. Health Care also lagged as election uncertainty often weighs on the sector with regards to future policy moves in Washington. Election season typically brings about a general sense of uncertainty and accompanying market volatility. As detailed in our recent blog on our website, however, investors should focus more on existing longer-term trends in their decision making than on election outcomes.
Long Term View
The price of the S&P 500 is up a modest but welcome 4% since the end of 2019, but that fact hides the details of the path to September 30th. Looking forward, however, there are reasons for optimism as medical science looks to be on the road to a Covid vaccine and has learned how to treat the disease more effectively. A vaccine is a big key to continuing the 3rd quarter’s economic momentum. Earnings estimates have risen after analysts saw upside 2nd quarter earnings surprises. Companies with cash-flush balance sheets are poised to grow into 2021 as the world starts to return to a more normal rhythm. That “normal” will look a little different, but people adjust as reality dictates. Experiencing 2020 has reinforced the idea that it pays to forge a well-crafted, long-term investment plan and follow that plan. A sturdy and resilient plan accounts for the inevitable uncomfortable periods along the journey, but sticking with the plan rewards investors.