Q3 2020 Market Recap

Global markets rallied in Q3, as both domestic and international equities posted sizeable returns. It was an up and down quarter as July and August brought strong gains of 5.6% and 7.2%, respectively. In fact, there were only four daily declines during the entire month of August. Things turned around in September when the positive trend reversed course and pushed markets briefly into correction territory. With Congress failing to reach an agreement on a stimulus deal and increased election volatility, the month “felt” worse than it actually was. At market close on September 30th, the S&P had only shed 3.8%.

So what happened in September?

COVID-19 cases are on the rise in the United States and in Europe. Current valuation multiples indicate that investors, by in large, are optimistic towards the prospects of a re-opening economy and are not pricing in a “third wave” of COVID. However, the possibility of a mild resurgence in cases did put pressure on equities and will likely continue to do so for the foreseeable future.

The death of Justice Ruth Bader Ginsburg created delays in addressing a new stimulus deal by diverting attention to the discussion of Justice nominations and the upcoming Presidental election. These hot-button issues held headlines until a continuing resolution was agreed upon to fund the Government through Mid-December.

At this point, the earliest we would expect a new stimulus deal is mid-November. This assumes that the following issues have been resolved: 1) That the Supreme Court Justice confirmation occurs before the election and 2) That both parties accept the election results as legitmate within a few days of November 3rd. If either of these issues stagnate, it is highly likely that any stimulus deal would be significantly delayed, possibly well into 2021.

Finally, recent economic data is suggesting a “plateauing” of the ongoing economic recovery in lieu of a stimulus deal, and while the rebound off April/May lows is statistically impressive, it’s important to remember that the economy remains well behind pre-COVID levels. It is our conclusion that the market continues to assume a “V-shaped” recovery in both economic data and corporate earnings, and that if this recovery does not unfold as currently anticipated, there will be heightened volatility ahead.