Third Quarter 2020 Update

October 30, 2020

KEY POINTS

• The U.S. economy is in the midst of a strong recovery from the unprecedented and sharp declines brought about by the policies implemented to stem the spread of the COVID-19 virus
• The Federal Open Market Committee (FOMC) maintained the aggressive monetary policy response to the crisis, leaving the funds rate target range of 0% to 0.25% unchanged. The central bank also stated that it is unlikely to consider raising interest rates anytime soon, perhaps not before 2023.
• After having staged an impressive rally in the second quarter, stocks continued to trend higher in the third quarter as businesses continued to open and the effects of COVID-19 became better known
• While the economy has avoided a Depression-level recession, there is still much work to be done to reach pre-COVID levels, with some economists estimating this could take as long as two years.

3rd QUARTER 2020 MARKET COMMENTARY

Below, we’ve highlighted 2020 broad market returns for the 3^rd quarter and year-to-date time periods:

Source: Refinitiv

THE GLOBAL ECONOMY

The US economy is in the midst of a strong recovery from the unprecedented and sharp declines brought about by the policies implemented to stem the spread of the COVID-19 virus. However, while the manufacturing segment has staged an impressive recovery, the service segment continues to be hampered by targeted lockdowns. It will not be possible for the economy to return to pre-COVID levels without the participation of the service segment, and analysts believe for that to happen widespread distribution of an effective vaccine would need to be in place.

Third quarter GDP increased 33% while the Bureau of Economic Analysis reported its third estimate of second-quarter 2020 gross domestic product (GDP) of -31.4%, somewhat better than the prior estimate, but far below the first-quarter reading.

The employment situation improved dramatically over the past few months, with employers adding 4.8 million, 1.7 million, 1.4 million and 661,000 jobs in June, July, August and September, respectively. The September report indicated that the unemployment rate fell to 7.9%, which is still 4.4% higher than September 2019. The Federal Open Market Committee (FOMC) maintained the aggressive monetary policy response to the crisis, leaving the funds rate target range of 0% to 0.25% unchanged. The central bank also stated that it is unlikely to consider raising interest rates anytime soon, perhaps not before 2023.

EQUITIES

After having staged an impressive rally in the second quarter, stocks continued to trend higher in the third quarter as businesses continued to open and the effects of COVID-19 became better known. Analysts have pointed out that the country seems to be learning to live with the virus. Businesses continued to open, and in some cases, schools attempted to bring students back on campus, either fully in person or through a hybrid program. Some analysts were surprised that stock prices were not more volatile, given the ebbs and flows of the election cycle. When the quarter ended, the S&P 500 Index had advanced +8.9% and is now up +5.6% year-to-date.  International stocks also posted solid gains during the quarter, and generally performed in line with US equities. The MSCI EAFE Index of developed markets stocks advanced by +4.8%, Emerging markets performance was strong, as the MSCI Emerging Markets Index was higher by +9.6%.

FIXED INCOME

The FOMC, as well as central banks throughout the world, continued to maintain an aggressive policy stance in an effort to minimize the adverse economic effects of COVID-19. The FOMC made no change to the federal funds rate target range of 0% to 0.25%, but the important news in the quarter was that the committee indicated that it would not raise rates through 2023. The Fed’s statement said that a rate increase would not occur until the economy is at full employment and the economy is on track for a moderate overshooting of the FOMC’s 2% inflation target. Analysts point out that the statement did not indicate how far above the 2% level the committee was willing to allow inflation to run before raising rates.

The shape of the Treasury yield curve was little changed during the third quarter, with yields on the shortest-term maturities declining modestly relative to yields in the intermediate- and long-term segments of the curve. Overall, in terms of level and shape the Treasury curve remained almost identical to the prior quarter, as the FOMC has signaled its monetary policy is unlikely to change for at least three years.

SUMMARY

The U.S. economy continues to recover from the unprecedented downturn resulting from efforts to stop the spread of COVID-19. While third-quarter real GDP growth increased 33% Q/Q, the economy is still on track to contract by an estimated 4.3% for the year. Consensus expectations for 2021 indicate that growth should rebound to approximately 3.6%. While the economy has avoided a Depression-level recession, there is still much work to be done to reach pre-COVID levels, with some economists estimating this could take as long as two years. However, there are so-called “green shoots” emerging, particularly in housing and the consumption of goods. Research firm Strategas Research Partners cautions that the “easy” part of the recovery – with 3Q growth estimated to be ~25% – may be over, and the trajectory will be more “shallow” moving forward unless more durable drivers of organic growth emerge. A second wave of the virus that causes some states to re-impose lockdowns could negatively impact the trajectory of the economic recovery. Catalysts that could accelerate growth include widespread distribution of a safe and effective vaccine sooner than anticipated, and increased confidence that the country is learning to live with the virus.

The outlook for both the global and US economies remains positive, but how quickly we are able to return to pre-COVID levels will depend on several factors, including how quickly point-of-care testing is available. Stock prices have rallied in a V-shape recovery, and while there are certainly early signs of froth in the market, analysts point out that with an expectation of low interest rates for several years there are few alternatives.

Information provided is for informational purposes only and should not be construed as investment advice. The views expressed are current only as of the publication date, are based on information that St. Clair Advisors believes to be accurate, and subject to change without notice. All investment decisions must be evaluated as to whether they are consistent with your investment objectives, risk tolerance and financial situation. St. Clair disclaims any liability for any direct or incidental loss incurred by applying any of the information in this publication. Indexes are unmanaged and one cannot invest directly in an index. Past performance is no guarantee of future results.

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