Markets & Macroeconomic View
The economic recovery continued throughout the quarter. U.S. manufacturing expanded for a 5th straight month ending September. Consumer spending climbed for a 4th consecutive month ending August. The unemployment rate dropped to 7.9% through September. It has gradually ticked down since peaking at 14.7% in April. Keep in mind the rate was 3.5% at the beginning of the year, a 50-year low.
However, 11.77 million people continued receiving unemployment benefits despite a drop of approximately 1 million claims the week ending September 19th. These peaked in May at approximately 25 million. The number of workers applying each week for first-time unemployment insurance benefits continues to hover at a historically high level-837,000 the week ending September 26th with another 840,000 last week.
The 2nd Quarter Gross Domestic Product or GDP contracted at an annualized rate of -31.4%, the worst quarter since the Great Depression. The current 3rd Quarter annualized GDP estimate is +35.3% (Federal Reserve Bank of Atlanta GDPNow). With this economic turnaround, the bulls were in control in July and August as the S&P 500 & Nasdaq made new all-time highs in early September. But stocks sold off most of September. The Nasdaq & S&P 500 suffered corrections (down 10% or more) from peak to trough before rebounding the last week of the quarter.
Even with the correction, the S&P 500 ended the quarter with its best six-month stretch since 2009. Of course, it climbed from a March bear market low. Markets are moving at an unprecedented pace. Volatility is high and will persist. It is always important to remember that time in the market is more important than timing the market.
High yield corporate bonds were the worst-performing bond category for the 1-year and 3-years but led for the quarter, 5, 10, and 15-years. Aggregate bonds led year-to-date, 1-year, and 3-years. Large-cap U.S stocks outperformed in all time periods. Real estate was the worst-performing stock category year-to-date and 1-year, while foreign stock was the worst for 3, 5, 10, and 15-years. Nevertheless, we continue to see opportunities outside the U.S and in real estate. The actively managed funds we use significantly outperform these respective benchmarks.
The markets are continuing to rally because of Fed policy stimulus that is even more aggressive than during the global financial crisis; and because of the fiscal stimulus passed by Congress, which gave money directly to individuals and businesses. The Fed not only dropped rates to zero but has recently mentioned they will stay at zero for the foreseeable future. Market participants continue to look past the negative aspects of the current macroeconomic environment, anticipating the recovery that would come from both more fiscal stimulus and an effective vaccine. The risk is if either of these are significantly delayed.
However, it is important to note that although the economic picture is improving, it is at a slower rate. The new economic data is positive but less and less positive. Millions of workers across the U.S. in industries hit hard by the pandemic continue to struggle. Layoffs are increasing with new rounds announced this past week, including Allstate, American Airlines, Disney, Goldman Sachs, and United Airlines, to name a few. The economy will not be in the clear until there is a cure that is readily available to everyone. As such, we anticipate that volatility will continue into next year.