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The summer brought an economic rebound and a continuation of the stock market rally that began in spring. In late September, the Federal Reserve Bank of Atlanta’s GDPNow tracker estimated real Gross Domestic Product (GDP) growth of 32.0% for the third quarter. All three of the major Wall Street benchmarks advanced in Q3; the S&P 500 added nearly 8%, ending the quarter up about 4% for the year. Even so, U.S. equities slumped in September as traders worried that the stock market might be getting ahead of the economy.1,2

In Washington, the Federal Reserve altered its monetary policy stance and forecast low-interest rates for the near future. Hopes for another economic stimulus dimmed in Congress. On Main Street, the coronavirus pandemic remained top of mind, but improvements in hiring, consumer confidence, and retail sales were evident.

Entering the fourth quarter, analysts wondered how adroitly the financial markets might manage some unknowns: a potential uptick in COVID-19 cases in the fall, the pace of vaccine development, the outcome of the presidential election, and undetermined prospects for additional economic support of businesses and households.


Economic Conditions:


U.S. – Steadying the Ship

GDP: The Atlanta Federal Reserve’s “GDP Now” model is suggesting that the third quarter of 2020 will see U.S. GDP grow by 32% on an annualized basis. U.S. consumer confidence increased in September 2020 with the Confidence Board rising to 101.8. With consumers making up 67% of U.S. GDP, rising confidence is critical for growth going forward. Retail sales and industrial production have also been surprisingly strong.

Unemployment: Many positive signals appeared in the quarter. Millions of Americans went to work again; monthly net job growth topped 1.7 million in July and 1.3 million a month later. Unemployment, which had hit 14.7% in April, fell from 10.2% in July to 8.4% in August, and the U-6 rate counting both underemployed and unemployed Americans declined from 16.5% to 14.2%.3,4

Housing: Home sales soared as summer began, and although that momentum tailed off, sales did not retreat. Residential resales were up 24.7% in July, and another 2.4% in August. New home buying increased 4.8% for August after a 14.7% July climb. Housing starts and building permits were both up 17.9% in the first month of the quarter, but then they both declined; permits dipped 0.9% and starts 5.1% in the eighth month of the year.3


 International – Muddied Waters

As economies worldwide continued to labor under the coronavirus pandemic, the International Monetary Fund (IMF) and Organization for Economic Cooperation and Development (OECD) revised their estimates of global economic activity for 2020 and 2021. The IMF sees a 3.0% contraction for global Gross Domestic Product (GDP) this year, with the global economy growing 5.8% next year. The OECD estimates a 4.5% pullback for global GDP in 2020, and then a 5.0% rebound in 2021.6

The quarter ended with no agreement yet on a post-Brexit trade deal between the United Kingdom and the European Union, as the post-Brexit transition period ends December 31. Complicating matters, U.K. lawmakers introduced a bill that would disregard conditions for trade with Northern Ireland established as part of Brexit, which the E.U. has hotly protested. U.K. Prime Minister Boris Johnson wants both parties to reach a free trade agreement this month; Johnson is aiming for a pact without quotas or tariffs attached, similar to the arrangement the U.K. has with Canada.7


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EQUITIES: Full Steam Ahead

U.S. Equities: Stocks powered through July and August, entering historic territory in mid-summer. In particular, August saw a powerful rally. The Nasdaq Composite climbed 9.59% in August, and the Dow Jones Industrial Average gained 7.57%, finishing with its best August since 1984. Advancing 7.01% to cap a 5-month winning streak, the S&P 500 had its best August since 1986. September got off to a good start, with a new record close for the S&P: 3,580.84. Traders began to question the sustainability of the summer economic recovery, and whether a fall uptick in coronavirus infections might hurt business and consumer spending. The S&P ended September at 3,363.00, retreating 3.92% for the month. The Dow lost 2.28% in September to fall to 27,781.70, and the Nasdaq gave up 5.16%, declining to 11,167.51.10,11,12,13

Developed International Equities: Looking at foreign stock exchanges, some significant quarterly gains stand out. Japan’s Nikkei 225 4.02%, and Germany’s DAX 3.65%. On the other side of the ledger, Hong Kong’s Hang Seng retreated 3.96%, and Spain’s IBEX 35 dipped 7.12%. MSCI’s EAFE index, which tracks large companies across developed countries in Europe and Asia, rose 4.90% in Q3.8,9

Emerging Markets:  Emerging market benchmarks added 9.19% for the quarter after a strong Q2 rebound, although the index remains down for the year by -2.06%. Individually, South Korea’s Kospi index rose 11.2% in three months; no other consequential overseas benchmark advanced double digits in Q3. China’s Shanghai Composite added 7.82%, Taiwan’s TWII 7.70%, and Argentina’s Merval 4.69%.


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FIXED INCOME: Inflation Adjustment

U.S. Fixed Income: Fed Chairman Jerome Powell announced that the central bank would “seek to achieve inflation that averages 2 percent over time,” rather than proactively adjust short-term interest rates when inflation approaches that established target. In other words, it would tolerate a little more inflation than it had in the past as a trade-off for spurring the economy. The Fed kept the federal funds rate in the 0%-0.25% range in the quarter, and its September consensus interest rate forecast showed it expected no change for short-term interest rates through 2022.4,5

On the back of these comments, the 10-year Treasury hovered around 0.75% as the U.S. Aggregate index added 0.65% during the quarter and is now up 6.99% so far in 2020.

Developed International Fixed Income: Global bonds rallied as yields generally fell. During the quarter, the BloomBerg International Bond Index added 1.07% and is now up 3.63% year-to-date.


Quarterly Focus: Hanging Chads

Many of us are now focused on the upcoming election – and many (most?) are looking forward to putting it behind us – and along with it the political ads, text messages, and robo calls all urging our support. As discussed in our monthly video (link) the most important lesson learned from previous elections has not been who has won or lost, but whether one stayed the course regardless of the outcome.  Due to the fact that the market’s long-term trend is higher, don’t let your political views distort your market views. Instead of picking a side politically, when it comes to investing at least, make sure that your allocation matches your risk-tolerance so that any short-term fluctuations can be weathered.  We can see below that staying invested regardless of who is in charge vastly outperforms investing only with your political party.  While a contested election will surely will bring a bout of volatility, a clear victory in either direction will likely be seen as decidedly positive because an unknown has been eliminated – and what the market despises more than anything else is a fear of the unknown.


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DPWM Outlook:  Looking for Clarity Amid Historic Uncertainty

Wall Street enters the fourth quarter with loads of uncertainty. The November election results may produce any number of reactions – and as we saw in the previous election, the leading candidate in polling and futures markets did not turn out to be the eventual winner.  A quick sell-off was met by an even quicker recovery. The first reading on 3rd-quarter Gross Domestic Product growth is on October 27, roughly one week before election day as well. As we saw in the Quarterly Focus, the market may view the timing of a vaccine as more critical than which party ultimately wins the election and there are only educated guesses as to when coronavirus vaccines may appear, and how effective they may be.  So expect more volatility especially in the next few weeks and ask yourself if you are comfortable with your current allocation regardless of the outcome? We experienced a good litmus test in March and as we approach new highs we have another opportunity to reevaluate our allocation and make sure that it still fits within overall retirement goals.  Make sure that whatever the outcome, you can sleep with whatever may come and we will diligently strive to build portfolios that are resilient during these uncertain times and continue to look for opportunities as they present themselves just as we did in March.  Amidst a global pandemic and a contentious presidential election just around the corner, we seem to be at a time of peak uncertainty, but with uncertainty brings opportunity and within a few short months our outlook should become markedly clearer.


1. Federal Reserve Bank of Atlanta, September 25, 2020
2. CNN Business, September 30, 2020
3. Investing.com, September 30, 2020
4. Forbes, September 16, 2020
5. New York Times, August 27, 2020
6. Nasdaq.com, September 30, 2020
7. Associated Press, September 29, 2020
8. Barchart.com, September 30, 2020
9. Wall Street Journal, September 30, 2020
10. CNBC, August 31, 2020
11. Business Insider, September 2, 2020
12. CNBC, September 30, 2020
13. Google Finance, September 30, 2020
14. Treasury.gov, September 30, 2020
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The information contained in this post is for general information purposes only. The information is provided by Q3 2020: Relative Calm and while we endeavour to keep the information up to date and correct, we make no representations or warranties of any kind, express or implied, about the completeness, accuracy, reliability, suitability or availability with respect to the website or the information, products, services, or related graphics contained on the post for any purpose.

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