September 2020 Monthly Review
Economic & Market Commentary
- The third quarter of 2020 was the second straight quarter of solid gains for risk assets, but the month of September showed the fragility of the markets and the continued reasons for caution. Stocks saw a few days with steep declines which served as reminders of March 2020.
- Equity market volatility picked up as the S&P 500 Index fell 3.8% during the month with notable drops in energy, technology, and communication services. Investors continue to closely monitor the upcoming Presidential election, the ongoing coronavirus concerns, and the West Coast wildfires.
- The bond market was stable as treasury prices moved slightly higher while corporate bonds saw spread pressure as longer-term corporates fell the most in price. Higher beta fixed income sectors such as high yield, fell in sympathy with equity prices. Returns on the Bloomberg Barclays High Yield TR Index fell -1.03% in September leaving it only +0.62% year-to-date.
- Employment and housing data remained strong, however, the consumer showed signs of weakening as retail sales numbers and certain confidence indicators fell.
- Mother Nature impacted markets in September as hurricane season and wildfires on the West Coast caused staggering amounts of damage leading to evacuations. Several economists are predicting that these disasters may cause up to a 1.0% loss in Q3 GDP.
- The FOMC met mid-month and noted that the Federal Reserve is “committed to using its full range of tools to support the U.S. economy in this challenging time, thereby promoting its maximum employment and price stability goals”. The Fed urged the government to follow up with much needed fiscal stimulus to restore economic growth. Chairman Powell reiterated that short-term interest rates would most likely remain near zero until 2023. This news had some investors frightened, while others shopped for yield plays in high dividend stocks and riskier bond issues.
- As expected, market volatility ramped up in September due to the upcoming US elections. The death of US Supreme Court Justice Ginsburg propelled the fulfillment of another Justice to the forefront of key election issues. The appointment of a new justice before the election seemed to replace fiscal stimulus discussions. Markets began to price in the possibility that there may be no additional stimulus deal because of the heightened polarization of political parties. The month-ended with the first Presidential debate, which most described as a circus.
- US Covid-19 cases continue to surge in some parts of the country as the President and First Lady recently contracted the virus. Markets continue to handicap the timing of a vaccine or the possibility of another national wave as flu season begins.
While interest rates hover around historic levels and absolute yields on municipal bonds and high-grade corporate bonds remain low, it is clear the “easy lifting” in bond performance may be done for 2020. Despite this, the tremendous uncertainty currently prevailing from the upcoming election and the path of Covid-19 should keep demand for safe bonds strong. While negative rates do not seem to be likely any time soon, there is a growing number of intangible events that have investors running for cover in 2020 with one more quarter to go. The Piton team continues to focus on maintaining a conservative posture, if broader markets fall, these portfolios should be a “port in the storm” despite low rates. Piton continues to focus on constructing quality portfolios intended to perform over the long term with a lower standard deviation than comparable funds and passive fixed income strategies.
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