The third quarter of 2020 marked the second consecutive quarter of the rapid and improbable global equity market recovery from the coronavirus lockdown lows of late March.  For the quarter, the S&P 500 Index gained 8.5% while the Dow Jones Industrial Average added 7.6%.  These gains pushed the S&P into positive territory for 2020 (+4.1%), a remarkable performance given the damage Covid-19 has inflicted on the global economy.

Third Quarter Activity

The third quarter was divided into two distinct periods.  In the first, which encompassed July and August, stocks continued their rapid but steady climb from the March lows.  Technology stocks, as they have since the beginning of this market rally, led the way.  Heavy buying of shares and options from a swelling cadre of individual investors along with large companies, notably Japan’s Softbank, pushed technology shares inexorably higher through July and August.  Both the S&P 500 and the NASDAQ set all-time closing highs on September 2, 2020.

But while the third quarter in its entirety was positive for equities, there was a distinct shift in investor sentiment in early September, which was the first negative month for U.S. stocks since March and which featured four down weeks in a row.  During the month, the S&P 500 dropped nearly 10% peak-to-trough.  Stock Trader’s Almanac devotees will point out that historically, September has been the worst month of the year for stocks.  There was no specific event that precipitated the September downturn, however.  Investor enthusiasm over the summer had driven stocks up much faster than their underlying businesses had grown, leaving a large valuation air pocket.  While technology remains the 2020 market leader, it also led the September decline.

We see three major factors impacting financial markets in the final quarter of the year.

Vaccine Progress

First, our progress on Covid-19 vaccines and therapeutics holds the key to better performance from the global economy over the next year.  With a tested and trusted vaccine that is distributed widely, along with more effective therapeutics and better, faster testing, the world can begin to get back to normal life and we will likely see a firm uptick in the rate of global economic growth.

Election Tensions

Second, with the U.S. election only a month away, stocks have maintained a constructive tone.  However, given the tightness and acrimony of the race, we think there is a good possibility that post-election confusion and challenges could roil the markets.

Fiscal Uncertainty

Third, fiscal support for the economy is running out from the initial efforts in the spring and Congress is trying to hash out another spending package to support individuals and businesses that the pandemic has impacted.  In recent days, we have seen a growing number of layoff announcements.  Disney is laying off 28,000 employees while United Airlines and American Airlines have said they will cut 32,000 jobs.  Unfortunately, there will probably be many more corporate layoff announcements in the coming months.  Whether or not Congress can get a deal done on another package is likely to significantly sour or sweeten investor sentiment as we head toward the close of this tumultuous year.

I hope everyone is staying safe.  Please contact me with any questions about the markets or your portfolio: thoms@orioncapitalmgmt.com