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Quarterly Summaries

2020 Quarterly Summaries

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Review of Securities Markets, Third Quarter, 2020

Diversified portfolios generated positive returns in the quarter ending September 30th as stocks continued to rebound from the major sell-off earlier in the year and high-quality bonds registered modest gains. The gains in stocks during the quarter were broad-based. U.S. stocks, as measured by the S&P 500 Index1, returned 8.9% while foreign stocks, as measured by the MSCI ACWI ex U.S. Index2, gained 6.3%. Within U.S. stocks, investors continued to favor the big technology stocks including Apple, Amazon and Facebook – the NASDAQ 100 Index3, which is dominated by these mega-tech stocks, gained 12.6% during the quarter. As regards foreign markets, Chinese stocks were among the top performers during the third quarter.

With the recent gains in stocks, the S&P 500 ended the quarter in positive territory for the year-to-date, up 5.6%. The S&P 500 doesn’t tell the whole story though. As the index has become increasingly dominated by the big tech stocks4, its returns have become less representative of the average U.S. stock. For a broader perspective, it is helpful to consider the S&P 500 Equal-Weighted Index5, which, as its name implies, weights the returns of all 500 stocks in the index equally. Through September 30th, the S&P 500 Equal-Weighted Index was down nearly 5% year-to-date. Foreign stocks declined by a similar amount for the year – the MSCI ACWI ex U.S. Index returned -5.4% through September.

Remarkable Rebound

In a year full of surprises, one of the biggest in the markets has been the magnitude of the rebound in stocks. Since the lows in March, U.S. stocks, as measured by the S&P 500, have gained more than 50% while foreign stocks have returned more than 40%.6 The strength of the rebound is remarkable considering the continued economic challenges and uncertainty caused by COVID-19. The rebound reminds us of just how difficult it is to successfully time the market. Back in March, the investment environment was bleak, as COVID-19 cases were mounting and substantial segments of the economy were shutting down. In the face of these shocking developments, the stock market plunged more than 30% in just one month. At the time, it seemed implausible that the stock market would rebound strongly over the following months, and it was thus tempting for some to dramatically reduce their stock allocations to avoid further losses. As we know now, this would have been a mistake given the huge rally since.

A Disconnect

While the stock market has rebounded, the economy has continued to struggle with COVID-related challenges, resulting in a widening gap between stock prices and underlying economic fundamentals. What explains this seeming disconnect? From our perspective, the biggest factor driving the market rebound has been the Federal Reserve. It is noteworthy that the stock market began its huge rebound on the very day, March 23rd, that the Fed announced its plans to expand its market support role to include purchases of corporate bonds. By indicating its intention to stray further into the private economy, the Fed created the perception among investors that it will do whatever it can to prop up stock prices. With the belief that the Fed will provide a safety net, some investors have been emboldened to take on more risk and bid up stock prices even as the path of the economy remains uncertain.

Given the Fed’s outsized role and the still uncertain economic environment, investors should treat the strong rebound since March with caution. One concern with the Fed’s interventions is that stock prices may be artificially elevated and thus have further to fall if the Fed’s response during the next market sell-off turns out to be more limited or ineffective. One of the key decision-makers at the Fed, Robert Kaplan7, alluded to this concern in an interview with the Wall Street Journal earlier this month. When asked if the Fed’s interventions this year have created the sense in markets that the central bank will always step in to protect investors from big losses, Mr. Kaplan responded, “I think it’s a fair criticism, and I worry about it.”

So how should investors position themselves in light of current stock market levels? As you might expect, we are not advocating substantial reductions in allocations to stocks – this approach would represent the very market timing strategy we advise against. Instead, we recommend a continued careful focus on both downside risk and long-term return opportunities. Even at current price levels, we expect stocks to generate long-term returns that are substantially higher than the returns generated by bonds and cash. To capture these higher returns, however, investors must be able to withstand the inevitable big stock market declines along the way.

Additionally, we recommend maintaining substantial diversification among stock holdings by including allocations to value stocks, smaller company stocks, REITs, and foreign stocks. As the big tech stocks have become increasingly larger portions of major U.S. stock indices such as the S&P 500, these indices have become less diversified. The last time this happened on this scale was the late 1990s, when many investors embraced the narratives of “this time is different” and “we’re in a new paradigm” to justify loading-up on tech stocks and the tech-heavy S&P 500. After the bubble burst in 2000, investors with concentrated exposures to tech stocks suffered much larger losses than investors who owned more diversified portfolios.8

The Elections

With the elections just weeks away, some clients have asked whether their portfolio strategy should be adjusted to reflect potential election results. We caution against making short-term bets in anticipation of any particular outcome. Even if a specific prediction turns out to be right, the stock market may react to the outcome differently than expected. Moreover, a look at history suggests that the performance of the stock market is much more heavily influenced by underlying economic conditions and prospects than by whichever party is in power at the time.

This year’s election has the added risk of a contested election. If the process of declaring a winner drags out, we may see greater stock market volatility and potential market declines. Here, too, we don’t recommend making changes to your portfolio in anticipation of this potential scenario given the many uncertainties involved.

If the first nine months is any indication, we will likely encounter a few more surprises in the markets before this year is over. We look forward to helping you navigate whatever new financial challenges may be in store.

1. S&P 500 Index: A market capitalization-weighted index that generally contains the 500 largest publicly traded stocks in the U.S., subject to certain restrictions. An index is unmanaged and not available for direct investment.

2. MSCI ACWI ex US Index: A market capitalization-weighted index that captures large and midcap companies in developed and emerging market countries excluding the U.S. An index is unmanaged and not available for direct investment.

3. NASDAQ 100 Index: A modified market capitalization-weighted index of the 100 largest and most active non-financial domestic and international issues listed on the NASDAQ exchange. No security may have a weighting of greater than 24%. An index is unmanaged and not available for direct investment.

4. As of September 30th, the combined value of stocks in the Technology and Communications sectors and Amazon comprised 41% of the total market value of the S&P 500, exceeding the previous high of 37% at the end of 1999. (Source: Bespoke Group, Morningstar, Yahoo Finance).

5. S&P 500 Equal-Weighted Index: An index that applies equal weights to all index constituents in the market capitalization-weighted S&P 500 Index. An index is unmanaged and not available for direct investment.

6. As measured by the Total International Stock Index (Source: Vanguard, Yahoo Finance).

7. Robert Kaplan is Chair of the Dallas Federal Reserve and a current voting member of the Fed’s decision-making body, the Federal Open Market Committee.

8. For the period from 3/31/00 – 9/30/02, the cumulative returns of the NASDAQ 100 Index and S&P 500 Index were -81% and -44%, respectively. Over the same period, U.S. small value stocks, as measured by the Fama French Small Value Index generated a cumulative gain of 20% and REITs, as measured by the NAREIT Equity REIT Index, gained 45%. (Source: Dimensional Fund Advisors, Morningstar).

Written by Rich Golinski, CFA, Chief Investment Officer, Principal; [email protected]

Quarterly Review of Securities Markets: Total Return

Index9Market06/30/20 – 09/30/20Year-to-Date – 09/30/20
Standard & Poor’s 500Large Co. U.S. Stocks8.9%5.6%
Russell 1000 ValueLarge Co. Value U.S. Stocks5.6%-11.6%
Russell 2000Small Co. U.S. Stocks4.9%-8.7%
MSCI All-Country World ex U.S.Foreign Stocks6.3%-5.4%
Barclays 1-5 Year Gov’t/CreditU.S. Shorter-Term Taxable Bonds0.4%4.4%
Barclays Aggregate BondU.S. Taxable Bonds (Broad-based)0.6%6.8%
Barclays 1-5 Year Muni BondU.S. Shorter-Term Tax Exempt Bonds0.7%2.5%
JPMorgan Global Ex-U.S. BondsHedged Foreign Bonds0.9%3.5%

Key Economic Indicators

  • The latest U.S. GDP growth figures (second quarter 2020) showed the economy contracted at a record pace of 31.4% on an annualized basis. This report covered the period with the most extensive lockdowns from COVID-19. Third quarter data is expected to show significant improvement. The first estimate of third quarter GDP will be released in late October and consensus expectations are for economic growth of as much as 25% to 35% on an annualized basis.
  • U.S. employment data for September showed the pace of job growth slowing even as the economy added 661,000 jobs during the month. The unemployment rate in September declined to 7.9% but remains elevated and far above the 3.5% rate reached before the pandemic. Economists expect the unemployment rate to remain in the 5%-8% range from now until the end of 2022.
  • The latest report on U.S. inflation (Consumer Price Index) showed an inflation rate of 1.3% in August versus the same month a year ago. The Core Consumer Price Index (CPI less food and energy) posted an annual increase of 1.7%. Both measures showed slightly higher inflation than the previous reports.
  • The Bloomberg Commodity Index10 9.1% during the third quarter, reflecting broad gains in most major commodities. Oil prices were little changed from the prior quarter while gold rose modestly during the third quarter, reaching $1,891 per ounce by quarter-end.

Key economic indicators compiled by Jeffrey Blanchard, CFA, Director of Research; [email protected]

9. Index Glossary:
Standard & Poor’s 500: A market capitalization-weighted index that generally contains the 500 largest publicly traded stocks in the U.S., subject to certain restrictions. The index includes the reinvestment of dividends. An index is unmanaged and not available for direct investment.
Russell 1000 Value Index: A market capitalization-weighted index composed of constituents in the Russell 1000 Index with low price to book ratios and lower forecasted growth rates. An index is unmanaged and not available for direct investment.
Russell 2000 Index: A market capitalization-weighted index of U.S. small cap stocks that consists of the 2,000 smallest publicly traded stocks in the Russell 3000 Index. An index is unmanaged and not available for direct investment.
MSCI All-Country World ex U.S.: A market capitalization-weighted index that captures large and midcap companies in developed and emerging market countries excluding the U.S. An index is unmanaged and not available for direct investment.
Barclays 1-5 Year Gov’t/Credit: A broad-based bond index that measures the non-securitized component of the US Aggregate Bond Index and targets bonds with maturities between 1 and 5 years. An index is unmanaged and not available for direct investment.
Barclays Aggregate Bond: A broad-based bond index that measures the investment grade, US dollar-denominated, fixed-rate taxable bond market. The index includes Treasuries, government agency bonds, corporate bonds and securitized fixed income securities. An index is unmanaged and not available for direct investment.
Barclays 1-5 Year Muni Bond: An Index that covers the USD-denominated tax exempt bond market with maturities of 1-5 years. The index includes state and local general obligation bonds, revenue bonds, insured and prerefunded bonds. An index is unmanaged and not available for direct investment.
JPMorgan Global Ex-U.S. Bonds: An index constructed of government bonds issued from developed countries outside the U.S. with the currency exposure hedged backed to the U.S. dollar. An index is unmanaged and not available for direct investment.

10. Bloomberg Commodity Index: This index reflects the return of a broad basket of commodity futures contracts with the collateral invested in 3 month Treasury Bills. An index is unmanaged and not available for direct investment.


The information presented within is for informational purposes only and is not intended to be used as a general guide to investing or financial planning, or as a source of any specific recommendations, and makes no implied or express recommendations concerning the manner in which any individual’s account should or would be handled, as appropriate investment or financial planning strategies depend upon the individual’s specific objectives. It is the responsibility of any person or persons in possession of this material to inform himself or herself of and to seek appropriate advice regarding, any investment or financial planning decisions, legal requirements, and taxation regulations which might be relevant to the topic of this report or the subscription, purchase, holding, exchange, redemption or disposal of any investments.

The portfolio risk management process includes an effort to monitor and manage risk, but does not imply low risk. Past performance is not indicative of future results, which may vary. The value of investments and the income derived from investments can go down as well as up. Future returns are not guaranteed and inherent in any investment is the potential for loss.

This report does not constitute a solicitation in any jurisdiction in which such a solicitation is unlawful or to any person to whom it is unlawful. Moreover, this report neither constitutes an offer to enter into an investment agreement nor an invitation to respond by making an offer to enter into an investment agreement.

Opinions expressed are current opinions as of the date appearing in this material only and are subject to change. No part of this material may, without the prior written consent of Bingham, Osborn & Scarborough, LLC, be (i) copied, photocopied or duplicated in any form, by any means, or (ii) distributed to any person that is not an employee, officer, director, or authorized agent of the recipient.


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