Q3 Review: The Relative Basis
Objects in the mirror are closer than they appear. Three quarters of the year is now behind us, and the rate of change for stock markets and our daily lives has been setting records. Recall that less than a year ago, COVID-19 was not in our vocabulary, now our lives in many ways feel 180 degrees different as a result of this disease.
The third quarter provided positive performance results for broad asset classes. The U.S. stock market (S&P 500) was up +8.93%, and international stocks were up +4.80% for developed and up +9.56% for emerging markets. These quarterly results are better than average. The broad U.S. bond market returned just +0.62%. Interest rates were relatively unchanged from start to finish; however, interest rates experienced some sizeable swings intra-quarter. Real estate and commodities were also positive on the quarter, returning +1.42% and +4.61%, respectively.
Swift and sizeable monetary and fiscal policy actions propped up the economy and ignited an advancement in the stock market of historic proportions. Many may wonder how it is that the stock market can climb so far so quickly. Recall that part of this is the base effect, the fact that the advancement started from a low point. Further, individuals' and businesses' ability to access cheap money is often a driver of economic activity. The Federal Reserve's holding of short-term interest rates near zero percent is stimulative for the economy. Investors often make decisions on a relative basis. As of month-end, 77% of the stocks in the S&P 500 stock index have dividend yields greater than the 10-year U.S. Treasury yield (source: Ned Davis Research). This level is near a record high, creating a catalyst for higher stock prices.
We are entering another quarterly earnings season, and elections are just around the corner. Surprises may continue; however, it is important to remember that financial plans and long-term investments are not dependent on just the short term.
Additional Notes:
During the 3rd quarter, the U.S. stock market (S&P 500) see-sawed month-to-month with September's decline of 3.80% negating part of August's 7.19% advance
Many of the mega-cap tech companies that led the market since the March lows underperformed during September. All FANMAG stocks underperformed the S&P 500
Apple (-10.3%), Facebook (-10.7%), and Google (-10.1%) were all down double-digits.
For the year, market breadth, or participation across all stocks, has been negative
60% of stocks in the S&P 500 Index are negative on the year despite the index being positive overall
Related, 5 out of 11 sectors are negative on the year
Third-quarter earnings season will be ramping up soon; revenues and earnings are projected by some analysts to be lower than one year ago by 4% and 22%, respectively
Federal Reserve Board data showed that most of the economy grew during the quarter, but was soft in part due to some temporary layoffs that became permanent
During the quarter, the unemployment rate did improve by falling from 11.1% to 7.9% (source: bls.gov)
U.S. retail gas prices, included in broad inflation measurements, were relatively unchanged during the quarter and ended at $2.26/gallon (source: eia.gov)
Interestingly, since 1993, the average cost of a gallon of gas has been $2.21, within pennies of the current level