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Third Quarter 2020 Investment Commentary

Equity markets continue on the path to recovery

U.S Stocks as measured by the S&P 500 had their best six month performance since 2009, up 5.6% year-to-date. Concentration in the index is affecting results as the top five companies in market capitalization comprise 22.6% of the index.* These top five (Apple, Microsoft, Amazon, Facebook and Google) have been less impacted by the pandemic due to the nature of their businesses and this explains a large part of the “disconnect” between the market and the economy. Notably without the top five stocks, the S&P index would have been down 3% year-to-date through August.* Small capitalization companies rebounded during the quarter but remain down year-to-date since they had further to climb from the low in late March. International stocks also bounced nicely in the quarter with emerging markets outperforming the more established markets outside of the U.S.

Interest rates remain low

High quality bonds added slightly to their positive performance so far this year. Federal Reserve policy makers have given guidance that interest rates will likely remain low through 2023 and a new practice of average inflation targeting will be used. While generating returns from high quality bonds over the next few years may be challenging, their role in balancing the volatility of stocks remains important. We continue to position core fixed income portfolios with a healthy allocation to shorter maturity bond funds since the interest rate difference between them and intermediate bonds is below average levels.

Most global economies show signs of improvement since Spring 2020

Federal Reserve actions and fiscal stimulus are stabilizing markets and cushioning the dramatic impact of the pandemic on the U.S. economy. Many have noted that equity markets reflect more positive news than we are seeing in the economy, predicting there is still a long way to go to normalcy. For example, approximately half of jobs lost have been recovered with the unemployment rate at approximately 8% currently.

Internationally, most of Asia is returning to normal sooner than the U.S. and Europe. Uneven recovery rates mean that including international stocks in your portfolio enhances diversification.

Expect continued uncertainty

The upcoming U.S. Presidential election and the course of the pandemic are key uncertainties that may drive market volatility higher for a time. In the long run, whether there is a Republican, Democratic or Divided Congress, the history since 1947 tells us U.S. markets and the economy tend to go up over time. **

 

Diversification and staying with your long-term investment plan are time tested defenses during turbulent times. If you experience a change in circumstances or are feeling a higher than usual level of concern, please contact your advisory team to discuss your situation.

Sources: *Dimensional Fund Advisors, **JPMorgan

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