Fidelity Bank - Wealth Management
September 2020 Market Review
US Equities finished the last month of third quarter with their first loss since March as the S&P 500 lost 3.80%. For the quarter, the S&P 500 still returned a healthy 8.93%. US investors’ angst were led by uncertainty in US election and unknown economic constraints due COVID-19. Advancements in treating the disease and hope of an effective vaccine have helped buoy investor confidence over the summer, but as students have returned to school, new daily cases have begun to rise slightly. Economic uncertainty rattled the bond market a bit as Bloomberg Barclays Aggregate Bond Index lost 0.05% as spreads expanded across corporate bonds and mortgage backed securities. On a quarterly basis, the Bloomberg Barclays Aggregate Bond index gained 0.62%.
Institute of Supply Management PMI surveys, which tracks sentiment among purchasing managers at manufacturing, construction and/or services firms, rebounded from negative levels not seen since the Global Financial Crisis to its fourth month in a row of expansion levels in September. A PMI reading above 50 indicates expansion, while below 50 indicates contraction. September’s reading of 55.4 is the fourth month in a row for expansion.
Over the last few months, GDP expectations have moderated from both high and low forecasts. According to the survey by Bloomberg, the median forecast for 2020 GDP is now a year-over-year fall of 4.30%. The good news is the economy most likely experienced most of that decline in the second quarter. The third quarter GDP release is at the end of October. Most economists are expecting third quarter GDP to be highly positive. The median Bloomberg GDP survey is expecting 25.3% quarter-over-quarter growth. An exceptional GDP growth number would indicate that the worst of the recession is behind us and may be nearing the end.
Historically, September has been the worst month of the year for stocks. Since 1950, the S&P 500 has lost on average 0.36% in September. This September was no different as the S&P 500 lost 3.80% and investors grew concerned about a slowing economic recovery. For the first time since September 2019, Growth stocks trailed Value stocks as investors fretted over Growth stocks’ atmospheric valuations. Value Stocks outperformed Growth stocks by 2.25%; losing 2.46% while Growth lost 4.71%. As was mentioned in last month’s review, a handful of technology stocks have been responsible for an overwhelming part of the stock market rally since March 23rd. If those same companies are excluded(Apple, Microsoft, Amazon, Facebook, Nvidia, and Alphabet) in looking at September’s performance, the S&P 500 only lost 2.17%. Said differently, 6 stocks accounted for more than 42% of the September decline in the S&P 500.
9 of 11 of the Global Industry Classification (GIC) sectors were negative in September. Energy, Communication Services, and Technology were the laggards losing 14.57%, 5.98% and 5.37%, respectively. Materials and Utilities were the lone bright spots, gaining 1.41% and 1.13%, respectively.
The US Dollar strengthened against Developed Markets but weakened against Emerging Market currencies in September. The Dollar Index, which measures the US Dollar against Developed Market currencies, gained about 1.89%. The MSCI EAFE index lost 0.99% in local currency terms but lost more than 2.60% in US Dollar terms. The MSCI Emerging Market Currency Index gained 0.44% versus the US Dollar in September. The MSCI Emerging Markets Index lost 1.65% in local currency and the conversion to US Dollars reduced that loss to 1.60% for US investors.
Treasury prices gained 0.14% in September as rates were choppy, but ended the month falling slightly across almost all maturities on the yield curve. The Bloomberg Investment Grade Corporate Bond Index and Bloomberg High Yield Corporate Bond Index lost 0.29% and 1.03%, respectively, during September as spreads widened. Investment grade spreads widened by 8 basis points or 6% while the High Yield bonds spread gapped out by 40 basis points or 8.40%. As of month’s end, Investment Grade Corporates and High Yield Corporates had and option adjusted spread of 1.45% and 5.17%, respectively, versus Treasury bonds.
Treasury Inflation Protected Securities (TIPS) experienced their first monthly loss since March declining 0.37%. As inflation expectations cooled, economic growth concerns spooked investors. On a year to date basis, TIPs outperformed nominal Treasuries by 32 basis points (+9.22% vs. 8.90%). Ten-year inflation expectations bottomed in March as market participants priced in expected inflation of only 0.55%. The Federal Reserve continues to target a long-term 2.00% inflation goal and are willing to allow inflation to trend above 2% in the short-term. As of the end of September, ten-year market implied inflation is 1.63% falling from 1.80% at the end of August
Commodities posted their first monthly decline since April, losing 3.35%. Energy and Precious Metals were the largest decline subcategories. Energy lost 9.62% and Precious Metals lost 7.68%. Agriculture was one of the bright spots, advancing 3.44%. Lumber prices have surged over the past several months as people are seeming undertaking house repair projects while spending more time at home. Lumber futures advanced nearly 279% from the April low to almost $985/1000 board feet in the beginning of September. From that peak, lumber futures collapsed 37.82% ending the month at $612.20/1000 board feet. This decline in price may serve as a welcome reprieve for those tackling projects around the house.
Real Estate Investment Trusts (REITs) lost about 2.66%, as confidence in the economic recovery and tenants’ ability to meet rent and mortgage payments weighs on the asset class. Still, there is significant uncertainty for retail concentrated REITs as many suspect the behavior of leery consumers will be significantly altered by the lockdowns. Year-to-date, REITs are down about 12.25%.
Daniel J. Santaniello, President and CEO, of Fidelity Bank, publishes Financially Fit with Fidelity, your guide to financial well-being, every Thursday. If you’re interested in a financial topic we haven’t yet covered or want to subscribe to our emails, please feel free to drop us a line at blog at fddbank dot com. We would love to hear from you.
September 2020 Market Review is intended solely to report on various investment views held by Fidelity Deposit & Discount Bank and is distributed for informational and educational purposes only and is not intended to constitute legal, tax, accounting, or investment advice. Opinions, estimates, forecasts, and statements of financial market trends that are based on current market conditions constitute our judgment and are subject to change without notice. Fidelity Deposit & Discount Bank does not have any obligation to provide revised opinions in the event of changed circumstances. All data is provided by Bloomberg Finance, LP and Morningstar Direct. We believe the information provided here is reliable but should not be assumed to be accurate or complete. Data, if not otherwise noted, is as of 9/30/2020. References to specific securities, asset classes and financial markets are for illustrative purposes only and do not constitute a solicitation, offer or recommendation to purchase or sell a security. Past performance is no guarantee of future results. All investment strategies and investments involve risk of loss and nothing within this report should be construed as a guarantee of any specific outcome or profit. Investors should make their own investment decisions based on their specific investment objectives and financial circumstances and are encouraged to seek professional advice before making any decisions. Index performance does not reflect the deduction of any fees and expenses, and if deducted, performance would be reduced. Indexes are unmanaged and investors are not able to invest directly into any index. The S&P 500 Index is a market index generally considered representative of the stock market as a whole. The index focuses on the large‐cap segment of the U.S. equities market.