Q3 Market Update: Are We There Yet?

2020 has been a wild ride. Let’s face it, most of us are ready to put this year in the past and move on. But we aren’t quite there yet, and there could be plenty more excitement to come before we wrap the year up. Are you prepared for what the last stretch of 2020 could bring?

Q3 Recap

After a devastating 1st quarter for stocks and risk assets, followed by a 2nd quarter recovery on the back of heavy monetary and fiscal stimulus, it had already been a rather wild ride for the first half of 2020. The 3rd quarter brought continued recovery at a more moderate pace, as most major indexes posted gains for the quarter.

In the U.S., the S&P 500 index gained 8.93% for the quarter. Large tech stocks drove the S&P 500 movements, surging through August before selling off in September. As of 9/30, the S&P 500 was positive for the year at 5.57%. Developed International stocks (MSCI EAFE Index) still trail the U.S. for the year, returning 6.25% in Q3 and -5.44% year-to-date.

The VIX, a widely-used stock volatility gauge, was at extreme levels around 4x its long-term average at the onset of the Covid-19 stock selloff in March & April. It has gradually trended downward through the 2nd and 3rd quarters, but still ended Q3 about 30% higher than its long-term average.

For Q3 2020, the estimated year-over-year earnings decline for the S&P 500 is -21.8% compared to Q3 2019. Believe it or not, that is an improvement from Q2 2020 which saw a -35.7% year-over-year earnings decline. Initial predictions are for a -12.1% year-over-year earnings decline for Q4 2020 before returning to positive earnings growth in 2021.

Economic Data

Jobs: Weekly initial jobless claims are still hovering about four times pre-pandemic levels, according to Labor Department figures. 837,000 initial claims were made in the week ended Sept. 25, which was notably down from the week before.

In September, the unemployment rate declined by 0.5 percentage points to 7.9 percent, and the number of unemployed persons fell by 1 million to 12.6 million. The economy has now recovered 11.4 million jobs, a bit more than half of the 22 million payrolls lost in March and April.

Economic Output: Real gross domestic product (GDP) decreased by -31.7% in Q2 2020 according to the "second" estimate released by the Bureau of Economic Analysis. In the first quarter, real GDP decreased 5.0 percent. As of October 1, The Atlanta Fed’s GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the third quarter of 2020 is a positive 34.6%. There is little doubt that we will experience a bounce in Q3 economic output; however, the recovery is likely to be more gradual thereafter.

For the full year 2020, the OECD (Organisation for Economic Cooperation and Development) is projecting between -7% and -9% annual growth rate in the U.S.

Topics to Follow in Q4

Election: The upcoming presidential election could lead to some increased volatility in markets. Wall Street has largely viewed a Trump second term as a continuation of business-friendly policies such as lower taxes and regulations. In contrast, a win for Joe Biden has been viewed as a higher tax structure with tighter regulations.

Investors grew increasingly anxious when President Trump implied that he would contest the results in the event of a Biden victory, which could add time to sort out the winner of the election and bring increased uncertainty to the markets.

During presidential elections, it can be easy to get caught up in topics of debate. When investing, it is important to remain focused on your long-term objectives. Don’t let political views impact financial goals!

Stimulus: We are uncertain whether another stimulus package will be approved and released by the end of 2020. Without more help, the economy could have a hard time sustaining the recovery we’ve seen the past couple of months. So far, the only progress on this round of stimulus has been an agreement to hold further discussions.

Adding to the difficulty to move these talks further is the passing of Justice Ruth Bader Ginsburg and filling her seat on the Supreme Court.

Virus and Vaccine Updates: Coronavirus cases continue to grow in the U.S. and Europe. New hot spots for cases include Spain, France, and the U.K., while South American countries, including Peru, Brazil, and Mexico, count thousands of new cases daily. Progress continues to be made toward vaccine distribution, with Dr. Anthony Fauci remaining optimistic that Americans will begin to be vaccinated in early 2021.

Summary

There is an historic amount of uncertainties for markets right now. However, with a disciplined approach and a solid financial plan, you should be equipped to weather any storm that 2020 throws at you!

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