Fidelity Bank - Wealth Management
October 2020 Market Review
US Equities recorded their second monthly decline in a row as the S&P 500 lost 2.66%. US investors’ angst were led by uncertainty in US election and unknown economic constraints due COVID-19. New cases of the virus have been spiking across the nation but particularly in the Mid-West. The Mid-West had not seen a large number of cases like the Northeast earlier this year and this represents their first spike. Advancements in treating the disease and hope of an effective vaccine have helped ward off any new sweeping economic lockdowns. Bloomberg Barclays Aggregate Bond Index lost 0.45% as Treasury rates increased but spreads thinned across Corporate Bonds and Mortgage Backed Securities.
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 fifth month in a row of expansion levels in October. A PMI reading above 50 indicates expansion, while below 50 indicates contraction. October’s reading of 59.3 is the fifth month in a row for expansion.
The GDP report showed the economy expanding at annualized rate of 33.1% in the third quarter. As we mentioned in last month’s market review, the median Bloomberg GDP survey expected 25.3% quarter-over-quarter growth. This expectations beating report likely indicates that the worst of the recession is behind us and may be nearing the end. 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 3.9%. The good news is the economy most likely experienced most of that decline in the second quarter.
For the second month in a row, Growth stocks trailed Value stocks as investors fretted over Growth stocks’ atmospheric valuations. Value Stocks outperformed Growth stocks across market cap. Large Cap Value beat Growth by 2.09%; losing 1.31% while Growth lost 3.40%. Small Cap Value beat Small Growth by 2.82%; gaining 3.58% while Small Growth gained 0.76%. From a factor perspective across all market caps, those stocks with highest sensitivity to the “value” factor outperformed those stocks with the lowest sensitivity to the factor by 5.70%.
10 of 11 of the Global Industry Classification (GIC) sectors were negative in October. Utilities were the only positive sector, gaining 5.04%. Technology, Energy, and Health Care were the laggards losing 5.10%, 4.27% and 3.68%, 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 October. The Dollar Index, which measures the US Dollar against Developed Market currencies, gained about 0.16%. The MSCI EAFE index lost 3.92% in local currency terms but lost more than 3.99% in US Dollar terms. The MSCI Emerging Market Currency Index gained 1.34% versus the US Dollar in September. The MSCI Emerging Markets Index gained 1.49% in local currency and the conversion to US Dollars increased that gain to 2.06% for US investors.
Treasury prices lost 0.94% in October as rates rose across almost all maturities on the yield curve. 10-, 20- and 30-year rates jumped about 20 basis points. The Bloomberg Investment Grade Corporate Bond Index lost 0.18%, while Bloomberg High Yield Corporate Bond Index gained 0.51% during October as interest rate levels increased but spreads thinned. Investment grade spreads contracted by 10 basis points or 7% while the High Yield bonds spread thinned out by 8 basis points or 2%. As of month’s end, Investment Grade Corporates and High Yield Corporates had and option adjusted spread of 1.35% and 5.09%, respectively, versus Treasury bonds.
Treasury Inflation Protected Securities (TIPS) experienced their second consecutive monthly loss declining 0.65%. On a year to date basis, TIPs outperformed nominal Treasuries by 64 basis points (+8.52% vs. 7.88%). 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 has indicated a willingness to allow inflation to trend above 2% in the short-term. As of the end of October, ten-year market implied inflation is 1.71% rising from 1.63% at the end of September.
Commodities rebounded after a loss in September gaining 1.41% in October. Agriculture and Industrial Metals led the way advancing 3.93% and 3.04%, respectively. Energy lost 0.55%, as WTI Crude Oil fell 11.54% but Natural gas jumped 12.14%. Real Estate Investment Trusts (REITs) lost about 3.35%, 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 15.21%.
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October 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 10/31/2020. 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.