FROM OUR INVESTMENT COMMITTEE: Q3 2020 in Perspective
MODERNIST’S ASSET CLASS INVESTING PORTFOLIOS ARE STRATEGICALLY INVESTED WITH A FOCUS ON LONG-TERM PERFORMANCE OBJECTIVES. PORTFOLIO ALLOCATIONS AND INVESTMENTS ARE NOT ADJUSTED IN RESPONSE TO MARKET NEWS OR ECONOMIC EVENTS; HOWEVER, OUR INVESTMENT COMMITTEE EVALUATES AND REPORTS ON MARKET AND ECONOMIC CONDITIONS TO PROVIDE OUR INVESTORS WITH PERSPECTIVE AND TO PUT PORTFOLIO PERFORMANCE IN PROPER CONTEXT.
Global stock markets continued to rebound during the third quarter and are still working to recover losses from the first quarter in most areas of foreign and domestic markets. This positive performance follows continued global efforts to reopen economies under social distancing guidelines during the quarter. While we cannot say with certainty what caused markets to move, the Fed’s new inflation-targeting policy, relative outperformance among equities in the technology sector, and the nearing of the U.S. presidential election all contributed to market growth and volatility.
For the quarter, U.S. stocks (as measured by the S&P 500 Index) gained 8.9%, and non-U.S. developed market stocks (as measured by the MSCI World Ex U.S.) gained 4.9%. Emerging market stocks (as measured by the MSCI Emerging Markets Index) gained 9.6%.
The U.S. Dollar Index, a measure of the value of the United States dollar relative to a basket of foreign currencies, decreased in the third quarter—the U.S. dollar decreased by 3.6% compared to foreign currencies. Over the past 12 months, the U.S. dollar depreciated by 5.5%. The decrease in the dollar is a tailwind to non-U.S. investments held by U.S. investors in the third quarter.
U.S. interest rates remained unchanged during the quarter as the Federal Reserve continues to maintain a target range of 0.0% to 0.25% for the Fed Funds rate. Since changes in interest rates and bond prices are inversely related, continued low interest rates helped increase the quarterly return for many bond asset classes.
U.S. Economic Review
The U.S. economy continued to contract as the year progressed. The final reading for second quarter 2020 GDP showed an annualized decline in economic growth of 31.4%, which is the largest percentage decline on record. The unemployment rate finished the quarter at 7.9%, which shows improvement from the previous quarter’s 11.1%. Domestic inflation remains low as the Fed’s preferred gauge of overall inflation, the core Personal Consumption Expenditures (PCE) index, stayed below the Fed’s target of 2.0% with a reading of 1.6% in August 2020.
Financial Markets Review
Both domestic and international stocks across all size and style categories, as well as U.S. real estate investment trust (REIT) securities, had positive performance during the quarter. International stock returns were also impacted by the weakening U.S. dollar. During the quarter, international small-cap stocks were the best performing and U.S. REIT securities were the worst performing. U.S. and global bonds continued performance from the previous quarter by posting positive results.
A diversified index mix of 65% stocks and 35% bonds would have gained 3.5% during the third quarter.
In the U.S., large-cap stocks outperformed small-cap stocks in all style categories. Value stocks underperformed growth stocks in all style categories. Among the nine style boxes, largecap growth stocks performed the best and smallcap value stocks experienced the least growth during the quarter.
In developed international markets, all nine style boxes were positive for the quarter. International small growth stocks were the highest performer. In contrast to the U.S., international small-cap stocks outperformed large-cap stocks across all styles.