Quarterly Market Review: Q3 2020


The Fed Tosses Out a Lifeline

In the third quarter of 2020, the market recovery continued unabated. Earlier this spring, the Federal Reserve made many decisions to try to address the economic impact of the COVID pandemic, most notably by lowering interest rates and establishing bond buying programs that essentially provide a government-backed guarantee for significant portions of the public bond market. With this decision, the Federal Reserve became the “buyer of last resort”. This powerful step, combined with lower interest rates, provided a much-needed boost in confidence and liquidity to the stock, bond and real estate markets.

The impacts of COVID have been felt broad throughout the economy – how we live, how we work and how we do business – and these changes, together with very low interest rates, have led to significant levels of activity and price increases can be seen in many areas, including the housing market. The Fed’s lifeline also changes the nature of the fixed income market. Now, with such low rates and unnatural market forces at work, fixed income investors have very little to gain from more conservative investments. With such minimal returns in fixed income, many are taking on greater risk in the stock market, for the opportunity to earn higher (or any) returns. This has certainly contributed to the stock market’s resurgence.

So, here we are now, with the stock, bond and housing markets at near all-time highs, while the U.S. and global economies struggle to re-open in the midst of an ever-present COVID pandemic. With a resurgence in COVID cases this fall, new rounds of economic support may be necessary, both monetary (the Fed) and fiscal (Congress).

While surely the Fed has disrupted “normal” market forces in the bond markets, we are benefitting from the market recovery. Clearly, we are not out of the woods yet. It’s also important to remember that, while many of the things we are experiencing this year are absolutely unprecedented, there has never been a time when everything in the world is going just fine (although trust me, I know many of us hope for that!). There’s always something. So, in a sense, it is “normal” to have plenty to be concerned about.

Another important thing to remember is that despite the election stress, resurgence of COVID cases and myriad of challenges created by this situation, it is all temporary and we will get through it. We are not investing for the next 3 months or even 3 years. We are here to help everyone maintain focus and discipline on the long-term goals. Wherever you find yourself, please know that we are here to be a resource.

Please be well, stay healthy and safe, and enjoy your upcoming holidays with renewed cheer!

Economic Indicators at a Glance

Below you’ll find a snapshot of some top-line economic indicators, followed by the Quarterly Market Review.

Data source: Trading Economics. 2020.

Market Summary Second Quarter 2020 Index Returns

Past performance is not a guarantee of future results. Indices are not available for direct investment. Index performance does not reflect the expenses associated with the management of an actual portfolio. Market segment (index representation) as follows: US Stock Market (Russell 3000 Index), International Developed Stocks (MSCI World ex USA Index [net div.]), Emerging Markets (MSCI Emerging Markets Index [net div.]), Global Real Estate (S&P Global REIT Index [net div.]), US Bond Market (Bloomberg Barclays US Aggregate Bond Index), and Global Bond Market ex US (Bloomberg Barclays Global Aggregate ex-USD Bond Index [hedged to USD]). S&P data © 2020 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved. Frank Russell Company is the source and owner of the trademarks, service marks, and copyrights related to the Russell Indexes. MSCI data © MSCI 2020, all rights reserved. Bloomberg Barclays data provided by Bloomberg.

World Stock Market Performance

MSCI All Country World Index with selected headlines from Q2 2020

Graph Source: MSCI ACWI Index [net div.]. MSCI data © MSCI 2020, all rights reserved.

It is not possible to invest directly in an index. Performance does not reflect the expenses associated with management of an actual portfolio.

World Asset Classes

Second Quarter 2020 Index Returns (%)

Equity markets around the globe posted positive returns in the third quarter. Looking at broad market indices, emerging markets equities outperformed US and non-US developed markets for the quarter. Value underperformed growth across regions. Small caps outperformed large caps in non-US developed and emerging markets but underperformed in the US. REIT indices underperformed equity market indices in both the US and non-US developed markets.

Past performance is not a guarantee of future results. Indices are not available for direct investment. Index performance does not reflect the expenses associated with the management of an actual portfolio. The S&P data is provided by Standard & Poor's Index Services Group. Frank Russell Company is the source and owner of the trademarks, service marks, and copyrights related to the Russell Indexes. MSCI data © MSCI 2020, all rights reserved. Dow Jones data © 2020 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved. S&P data © 2020 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved. Bloomberg Barclays data provided by Bloomberg. Treasury bills © Stocks, Bonds, Bills, and Inflation Yearbook™, Ibbotson Associates, Chicago (annually updated work by Roger G. Ibbotson and Rex A. Sinquefield).

U.S. Stocks

Second Quarter 2020 Index Returns

The US equity market posted positive returns for the quarter, outperforming non-US developed markets but underperforming emerging markets. Value underperformed growth across large and small cap stocks. Small caps underperformed large caps. REIT indices underperformed equity market indices.

Past performance is not a guarantee of future results. Indices are not available for direct investment. Index performance does not reflect the expenses associated with the management of an actual portfolio. Market segment (index representation) as follows: Marketwide (Russell 3000 Index), Large Cap (Russell 1000 Index), Large Cap Value (Russell 1000 Value Index), Large Cap Growth (Russell 1000 Growth Index), Small Cap (Russell 2000 Index), Small Cap Value (Russell 2000 Value Index), and Small Cap Growth (Russell 2000 Growth Index). World Market Cap represented by Russell 3000 Index, MSCI World ex USA IMI Index, and MSCI Emerging Markets IMI Index. Russell 3000 Index is used as the proxy for the US market. Dow Jones US Select REIT Index used as proxy for the US REIT market. Frank Russell Company is source and owner of trademarks, service marks, and copyrights related to Russell Indexes. MSCI data © MSCI 2020, all rights reserved.

Real Estate Investment Trusts (REITs)

Second Quarter 2020 Index Returns


US real estate investment trusts underperformed non-US REITs during the quarter.

Past performance is not a guarantee of future results. Indices are not available for direct investment. Index performance does not reflect the expenses associated with the management of an actual portfolio. Number of REIT stocks and total value based on the two indices. All index returns are net of withholding tax on dividends. Total value of REIT stocks represented by Dow Jones US Select REIT Index and the S&P Global ex US REIT Index. Dow Jones US Select REIT Index used as proxy for the US market, and S&P Global ex US REIT Index used as proxy for the World ex US market. Dow Jones and S&P data © 2020 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved.

Select Market Performance

Second Quarter 2020 Index Returns

In US dollar terms, Sweden and Denmark recorded the highest country performance in developed markets, while Portugal and Spain posted the lowest returns for the quarter. In emerging markets, India and Pakistan recorded the highest country performance, while Turkey and Thailand posted the lowest performance.

Past performance is not a guarantee of future results. Indices are not available for direct investment. Index performance does not reflect the expenses associated with the management of an actual portfolio. Country performance based on respective indices in the MSCI World ex US IMI Index (for developed markets), MSCI USA IMI Index (for US), and MSCI Emerging Markets IMI Index. All returns in USD and net of withholding tax on dividends. MSCI data © MSCI 2020, all rights reserved. UAE and Qatar have been reclassified as emerging markets by MSCI, effective May 2014. Saudi Arabia and Argentina have been reclassified as emerging markets by MSCI, effective May 2019.

Fixed Income

Second Quarter 2020 Index Returns

Interest rate changes were mixed in the US Treasury fixed income market during the third quarter. The yield on the 5-year US Treasury note decreased by 3 basis points (bps), ending at 0.31%. The yield on the 10-year US T-note rose by 3 bps to 0.64%. The 30-year US T-bond yield increased by 5 bps to 1.46%.


On the short end of the yield curve, the 1-month US Treasury bill yield decreased to 0.08%, while the 1-year T-bill yield decreased by 5 bps to 0.14%. The 2-year US T-note yield finished at 0.09% after a decrease of 2 basis points.


In terms of total returns, short-term corporate bonds returned 0.92% for the quarter. Intermediate-term corporates returned 1.33%.


The total return for short-term municipal bonds was 0.83%, while intermediate munis returned 1.40%. Revenue bonds outperformed general obligation bonds.

One basis point (bps) equals 0.01%. Past performance is not a guarantee of future results. Indices are not available for direct investment. Index performance does not reflect the expenses associated with the management of an actual portfolio. Yield curve data from Federal Reserve. State and local bonds are from the S&P National AMT-Free Municipal Bond Index. AAA-AA Corporates represent the ICE BofA US Corporates, AA-AAA rated. A-BBB Corporates represent the ICE BofA US Corporates, BBB-A rated. Bloomberg Barclays data provided by Bloomberg. US long-term bonds, bills, inflation, and fixed income factor data © Stocks, Bonds, Bills, and Inflation (SBBI) Yearbook™, Ibbotson Associates, Chicago (annually updated work by Roger G. Ibbotson and Rex A. Sinquefield). FTSE fixed income indices © 2020 FTSE Fixed Income LLC, all rights reserved. ICE BofA index data © 2020 ICE Data Indices, LLC. S&P data © 2020 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved.

This report was prepared by Gregory Saliba.

Gregory Saliba

President, Taurus Capital Management

saliba@tauruscap.com

(503) 756-2972

  • 20+ years in Corporate Finance, Debt Capital Markets and Investment Management

  • 2010 Oregon Ethics in Business Award Recipient

  • Public Speaker on Risk, Behavioral Finance and Ethics

  • Finance Faculty Member (12+ years)

  • Willamette University, Atkinson Graduate School of Management

  • Portland State University, School of Business Administration

  • Extensive Community Involvement


Recent Posts
Archive
Search By Tags

© 2020 by Taurus Capital Management

Taurus Capital Management is a registered investment adviser in the State of Oregon and the State of Washington. The adviser may not transact business in states where it is not appropriately registered, excluded or exempted from registration. Individualized responses to persons that involve either the effecting of transaction in securities, or the rendering of personalized investment advice for compensation, will not be made without registration or exemption.

Privacy Statement