Portfolio Research Director, Kevin E. Donovan, CFA, shares his thoughts on the third quarter and what to expect between now and year-end.
Hello, I’m Kevin Donovan, Portfolio Research Director at CJM Wealth Advisers. I’m here to talk about the third quarter. Now, 2020 has been a unique year for many reasons. Obviously, the coronavirus has upended our work lives, our social lives, school lives for our kids, but you wouldn’t know that if you looked at the stock market returns for the third quarter. I want to put up a chart of third quarter performance of the major indexes. As you can see from this chart, everything was positive. We had the two major US indexes, the S&P 500 and the Dow Jones Industrial averages being positive. International and emerging markets were both up and bonds were up slightly so it was a good quarter from a market perspective.
Now, there are two different stories to the quarter. If you look at July and August, obviously things were looking really, really well in the market. We hit a peak on September 2nd when the S&P 500 was up over 15%. After that, we had a bit of a selloff through September and the S&P ended up 8.5%. Now in the beginning of the quarter, we had some good news coming out. We had earnings results for the second quarter and the second quarter was the first full quarter that companies really felt the full impact of the coronavirus shutdown. The expectations for earnings were very, very low and companies beat those low expectations, so that was good. They did a little better than the worst fears that were out there.
Also, we were seeing some signs of economic recovery. Employment trends were beginning to turn positive, which is always good. Then when September came around, the market had risen to such an extent, especially the growth stocks, like technology stocks in particular, evaluations were very, very high. Investors became a little concerned about those high evaluations, maybe these stocks have risen too far, too fast. We saw a bit of a pullback there and, also, we saw some slowdown in the economic trends that we had been seeing that were going on that were positive. Employment trends, for instance, began to slow down so less people were getting jobs. We saw some big announcements of some big layoffs by some major corporations. That really hits some investor confidence throughout September and September was actually a down month, but for the quarter as a whole, things looked pretty good.
If you look at the emerging markets return in there, it’s actually a little higher than the S&P 500. A big part of emerging markets is China and China is well ahead of us right now, in terms of coming out of the COVID crisis. A larger part of their economy is open. Things like movie theaters are open in China, so they’re doing better. That’s why emerging markets did particularly well in the third quarter.
Now, if you look at the full year chart, which we’ll put up now. It shows a little bit of a different story, only bonds and the S&P 500 are positive year-to-date. Still, the losses that we’re seeing in the other indexes, the international indexes and the Dow are very minor, especially when you consider how far down we were in March. The comeback inequities has been remarkable. People were talking about not seeing highs again for another two or three years. Well, it took about six months for the S&P to hit a new high. One thing to note on the year-to-date chart is how steady bonds have been and how bonds are leading so far this year.
This is why we hold bonds. In times of great stress in the markets, you want something that’s going to be stable when markets are down, bonds are usually up. Everything took a hit in March because March was just such a unique period, but bonds came back and they’ve been held steady. You can see it’s a straight line across since March for bonds, and they’re up almost 7% year-to-date.
What are we looking for going forward? Obviously, in about a month from now, we’re going to be having a presidential election. We are long-term investors. We have looked at past elections and how they impact longterm investment results. Basically, they have no impact on long-term results. We would discourage people from investing based upon their political beliefs. The market doesn’t really care who’s in office. They care about business results. You may see some volatility around election time, particularly if things get crazy or even more contentious than they are now, but long-term, we’re long-term holders. We’re not concerned in the longterm about that.
Things to be concerned about, though, are the rate of recovery of the economy from the coronavirus. If infections tick up… We are starting to see a little bit of an increase now in infections. If we see that rise dramatically, where we have to get to the point where we’re shutting things down again, that would obviously be a major concern.
Then earning season, again, is coming up in the third quarter. We are expecting earnings to decline based upon this third quarter this year versus the third quarter of last year, but they are expected to be better than they were during the second quarter. We’ll be looking at earnings numbers and they’ll be coming in right around election time so it’s going to be a busy November. We’d like to thank you on behalf of CJM Wealth Advisers for placing your trust in us and we hope you have a healthy and safe rest of the year.
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