By Tim Courtney, Chief Investment Officer
2020 has been a challenging year to say the least. Markets have followed suit and have been more unpredictable than ever.
Against the backdrop of the coronavirus pandemic, we experienced both the fastest bull-to-bear market1 as well as the best 50-day market performance on record this year.2 When the market bottomed on March 233, many well-known investors were predicting the S&P 500 would continue falling.4 Today, market sentiment has flipped 180 degrees and we are hearing many pundits calling for the S&P 500 to add an additional 20% to 30% in returns over the next year.5
This underscores just how volatile markets have been as well as how unpredictable they are. As we head into the fourth quarter, there are three key items that will likely impact market behavior in the near term.
- Presidential election.Judging by the CBOE Volatility Index (VIX), a commonly accepted measure for market volatility, investors are feeling unsettled by the November 2020 presidential election.6The measure is signaling elevated expected volatility around the time of the election. A potential change in policy and regulatory environment in 2021 will certainly have the market’s attention. If a clear frontrunner in the presidential and Senate races becomes known in the weeks ahead, market prices will likely begin to reflect that.
- Unemployment and consumer confidence/spending.When the economy first started to reopen in late May/early June following coronavirus-related shutdowns, unemployment numbers dropped significantly.7As time has gone on though, the improvements have been less robust. Private companies added 428,000 jobs during the month of August, well below expectations.8 Additionally, unemployment claims remain much higher than we would typically see during an economic recovery.9 So while the unemployment situation is improving, and a surprisingly strong consumer confidence reading in September might indicate coming strength10, we’ll see if this translates into greater household spending that the economy needs.
- Interest rates and areas of market recovery.We have seen conflicting signals from the markets over the last few months. Stock markets have recovered3and housing prices remain high11 suggesting strength, but the bond market has been signaling trouble ahead. The bond market’s extremely low longer-term rates12 are a warning that future growth may be depressed. We have seen bond markets stabilize over the last couple of months, and we will be watching to see if interest rates continue to signal coming weakness and soft inflation.
Even while nearly all areas of the equity market have recovered strongly since late March,
investors have continued to favor those companies they believe to be recession proof over more economically sensitive stocks, such as financials, consumer discretionary and industrials. These areas typically lead in a recovery but have not so far. If the market becomes more confident of a broad recovery, we will likely see these kinds of companies beginning to lead.
There is no denying we are in a period of economic recuperation, but it remains to be seen how the recovery plays out. Because of the traumatic hit to the economy, we believe the recovery will be uneven and will require many quarters before we get back to normal gross domestic product (GDP) and earnings levels. We will continue to keep a close eye on the factors discussed above to inform our investment decisions as we approach year-end.
1. Forbes (3/12/20) — The bear market is here! Fastest plunge of 20% on record
2. CNBC.com (6/3/20) — This is the greatest 50-day rally in the history of the S&P 500
3. Yahoo! Finance (data as of 9/25/20) — S&P 500
4. MarketWatch (4/6/20) — Wall Street star money manager says S&P 500 could plunge to 1,500 in worst case, with coronavirus fallout lingering for years
5. Business Insider (7/6/20) — ‘You’re going to get a rocket ship’: Veteran strategist Jeff Saut sees the S&P 500 breaking 4,000 in the next 12 months
6. CNBC.com (9/15/20) — Here’s how options traders see market volatility surrounding the presidential election
7. USA Today (6/5/20) — Defying predictions, economy gains 2.5M jobs and unemployment dips to 13.3% as businesses start to reopen amid COVID-19
8. CNBC.com (9/2/20) — Private payrolls grow by 428,000 but miss expectations, ADP report says
9. U.S. Department of Labor (9/4/20) — The employment situation — August 2020
10. The Associated Press (9/29/20) – Consumer confidence posts solid gain to 101.8 in September
11. MarketWatch (8/24/20) — ‘The housing market is on a sugar high’: Home sales are soaring, but is it a good time to buy? Here’s what the experts say
12. The Washington Post (2/21/20) – As Treasury bonds hit historic low, tale of two markets and an uncertain U.S. economy emerges
The S&P 500® is widely regarded as the best single gauge of large-cap U.S. equities. There is over USD 9.9 trillion indexed or benchmarked to the index, with indexed assets comprising approximately USD 3.4 trillion of this total. The index includes 500 leading companies and covers approximately 80% of available market capitalization.
Created by the Chicago Board Options Exchange (CBOE), the Volatility Index, or VIX, is a real-time market index that represents the market’s expectation of 30-day forward-looking volatility. Derived from the price inputs of the S&P 500 index options, it provides a measure of market risk and investors’ sentiments.
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