Now What?
3rd Quarter
Commentary 2020
0.0%
Bloomberg Barclays US Treasury 3M
Cash
2.7%
Bloomberg Barclays Global Agg Bond
Fixed Income
7.6%
S&P GSCI (Commodities)
Commodities
7.8%
MSCI EM (Emerging Markets)
2.9%
MSCI All Country World Ex-U.S.
International Equity
8.5%
S&P500
U.S. Equity
Q3-2020
Index
Asset Class
Considering the ongoing global pandemic, the healing job market and economy, and the imminent U.S. election, the unpredictability of this year looks set to continue in the fourth quarter. Taking center stage is the pandemic. While the public appears increasingly numb to the data, COVID is still not under control in the United States as case counts continue to mount. Without a readily available vaccine and/or therapeutic, the potential for another wave of outbreaks erupting during the winter flu season poses a real risk.
A resurgence in COVID cases could dampen the economic recovery now clearly underway. Third-quarter GDP is estimated to have risen at a 25%-plus annualized rate, and a number of economic variables such as retail sales and the residential housing market have experienced full V-shaped recoveries, with activity in each of these areas now higher than it was at the peak of the last cycle in February. Sales of durable goods—such as autos, furniture, home furnishings, bicycles, and building and gardening equipment—have also been very strong, as individuals are re-orienting around their homes.
We are not out of the woods just yet, however. Overall economic activity as measured by GDP remains lower than it was at the start of the year, albeit rebounding, and the labor market remains fragile. The unemployment figure, while half of what it was in April, does not include the subset of the population that is receiving pandemic program benefits. In addition, many companies are discovering that in a “new normal” post-COVID environment, they may not need as many workers (or as much office space) as they had previously. While the recovery in lost jobs through September is extremely encouraging, the easy gains have largely been made, and there is more work to be done.
Employment (and the economy) would undoubtedly experience a boost (shot in the arm) if one of the nine vaccine candidates currently in late-stage clinical trials receives FDA approval by the end of the year, as has been rumored. While there are still many uncertainties about the potential vaccine (efficacy, immunity duration, safety profile, cost, administration protocol, distribution, etc.), we believe controlling COVID with a vaccine is a matter of when and not if. Importantly, once a plan is in place, we do not expect the Fed to interfere with what could be a sustainable and extended economic recovery. The recent move by the Fed to target “average” inflation is a significant shift and signals a continuation of “easy” accommodative monetary policy for what may be years to come. All else equal, this should keep interest rates lower for longer, lengthen the economic expansion, and potentially delay the ill effects of higher interest rates on equity and other capital markets.
The upcoming presidential election is unnerving to many. We fully recognize the stark choice in front of American voters, but historical data suggest that presidential elections do not tend to be overly meaningful for capital markets over the longer term. A Biden victory with Democrats sweeping both chambers of Congress would likely generate the most short-term volatility as the market would need to reprice scenarios related to tax policy. However, we would view any significant dislocation in markets surrounding the election as a potential buying opportunity.
As has everyone, we have been adapting through this highly unusual year. We continue to think deeply about the world after the coronavirus and what long-term implications may look like for markets and investors. While future gains may be more difficult to achieve, we are comfortable with our medium-term outlook for the global economy, corporate profits, and especially the path of improvement for the investments that we currently own. We are not making wholesale changes to portfolios, only tweaking investments on the margin where conditions warrant. We fully intend to stick to our long-term discipline of finding competitively advantaged investments with strong growth prospects that we believe we will be rewarded for sticking with in good times and bad.
As always, please do not hesitate to reach out with questions.
Regards,
The roller coaster of a year continued during the third quarter across capital markets. July and August saw further positive price momentum as U.S. equity markets made multiple record highs, international equities firmed, and fixed-income markets grinded higher.
The strong rally from the March lows seemed unending and was driven by 1) stronger-than-expected economic data (mainly employment numbers), 2) ample monetary and fiscal support from the world’s central banks, 3) better-than-anticipated corporate profits and future guidance, and 4) prospects for a COVID-19 vaccine. Remarkably, by mid-August, most equity indices had actually turned positive for the year.
The equity market’s streak of five monthly advances came to an end in September. Historically a weak month for equities, September saw stocks correct over concerns about the presidential election, persistently troubling COVID case data, and the worry that fiscal stimulus may have peaked. Despite this correction, most assets across class and geography still managed to exit September with positive returns for the quarter and for the year. Your portfolios have largely followed suit. Considering the severity of the pandemic and its impact on the economy, these are terrific outcomes. Patience has been rewarded for staying the course in the eye of the storm. The table below depicts third-quarter and year-to-date returns by asset class.
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Cathy Abbott
cabbott@williamblair.com
+1 312 364 5376
Candy Vondra
cvondra@williamblair.com
+1 312 364 8169
Lauren Thompson
lthompson@williamblair.com
+1 312 364 8845
Cam McKinney, Partner
cmckinney@williamblair.com
+1 312 364 8082
John Cimaroli, Partner
jcimaroli@williamblair.com
+1 312 364 5020
Patrick Rule
prule@williamblair.com
+1 312 364 8879
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The opinions expressed in this report are not necessarily the same as William Blair & Company L.L.C.’s Equity Research department. This information should not be construed as a research report, as it is not sufficient enough to be used as the primary basis of investment decisions. This information has been prepared solely for informational purposes and is not intended to provide or should not be relied upon for accounting, legal, tax, or investment advice. We recommend consulting your attorney, tax advisor, investment, or other professional advisor about your particular situation. Investment advice and recommendations can be provided only after careful consideration of an investor’s objectives, guidelines, and restrictions. Any investment or strategy mentioned herein may not be suitable for every investor, including retirement strategies. The factual statements herein have been taken from sources we believe to be reliable, but accuracy, completeness, or interpretation cannot be guaranteed. Past performance is not necessarily an indication of future results. All views expressed are those of the author, and not necessarily those of William Blair & Company, L.L.C. “William Blair” is a registered trademark of William Blair & Company, L.L.C.
Source: FactSet
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We cannot recall many times in the past when the level of anxiety about the global economy and geopolitics has been so high, yet the equity markets have been so resilient.
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Jenna Kiernan
jkiernan@williamblair.com
+1 312 364 5050
Gael Craven
gaelcraven@williamblair.com
+1 312 364 8552
Lauren Thompson
lthompson@williamblair.com
+1 312 364 8845
0.6%
6.2%
(18.4%)
5.2%
(4.7%)
9.4%
YTD-2020
Source: FactSet
0.0%
Bloomberg Barclays
US Treasury 3M
Cash
2.7%
Bloomberg Barclays Global Agg Bond
Fixed Income
7.6%
S&P GSCI (Commodities)
Commodities
7.8%
MSCI EM (Emerging Markets)
2.9%
MSCI All Country
World Ex-U.S.
International Equity
8.5%
S&P500
U.S. Equity
Q3-2020
Index
Asset Class