Reality Check
Plus Q3 Market Report

Investors could be forgiven for feeling disconnected from reality at the end of Q3 2020. Among many disrupted patterns and expectations, we’ve witnessed a skyrocketing stock market amidst deepening global economic pain and human suffering. Yes, there are always opportunities hidden within calamities. But who could have predicted the astounding gains of the last two quarters?

There was a brief period of volatility in September when it felt the tide was about to turn, but then markets regained their footing. Both the S&P 500 and Dow Jones ended Q3 with respective three-month gains of 8.5% and 7.6%. This follows even bigger gains in Q2. The result is the best two-quarter performance since 2009. Since the end of March, both indexes are up more than 26%.

The biggest winners are in tech. The Nasdaq added 11% in Q3, and 45% since the start of Q2, notching its biggest two-quarter gain since the dot-com meltdown in 2000. It is up an impressive 24% YTD. But most indexes are roughly back to where they started the year—a relief to many investors, but nothing to write home about. The S&P 500 is up 4.1% YTD, and the Dow is down -2.7%. Yields on the 10-year US Treasury note moved higher for the quarter.

The news right now is all about US elections, with some analysts anticipating high market volatility in coming weeks. Congress has failed to come to agreement on a new stimulus bill. Some investors are guessing that the tech rally has played out and are moving to more cyclical value stocks with lower price-to-earnings ratios. How things will play out in Q4 is anyone’s guess.

At Cardiff Park, we advise our clients to focus on achieving long-term goals. Altering a portfolio based on best guesses about market direction or timing may make you feel better, but such moves are more likely to result in financial harm than benefit. Better to let the market do its work and manage risk according to asset allocation and diversification. Recall the gut-wrenching dread of March, and how fear might have affected your decisions then. The tide may turn again. The best way to prepare is to understand your strategy and risk tolerance. Then stick to your plan. As always, if you have questions or concerns, I am here to help. Now let’s take a closer look at Q3 numbers.

Quarterly Review

Courtesy of DFA

World Asset Classes ¹

Equity markets around the globe posted positive returns in the third quarter. Looking at broad market indices, emerging markets equities outperformed US and non-US developed markets for the quarter. Value underperformed growth across regions. Small caps outperformed large caps in non-US developed and emerging markets, but underperformed in the US. REIT indices underperformed equity market indices in both the US and non-US developed markets.

US Stocks ² (57% of Total Market)

The US equity market posted positive returns for the quarter, outperforming non-US developed markets but underperforming emerging markets. Value underperformed growth across large and small cap stocks. Small caps underperformed large caps. REIT indices underperformed equity market indices.

International Stocks ³ (31% of Total Market)

Developed markets outside the US posted positive returns for the quarter, but underperformed US and emerging markets equities. Value underperformed growth. Small caps outperformed large caps.

Emerging Market Stocks ⁴ (12% of Total Market)

Emerging markets posted positive returns for the quarter, outperforming the US and developed ex US equity markets. Value underperformed growth. Small caps outperformed large caps.

Real Estate Investment Trusts ⁵

US real estate investment trusts underperformed non-US REITs during the quarter.

Commodities ⁶

The Bloomberg Commodity Index Total Return returned 9.07% for the third quarter of 2020. Lean hogs and silver were the best performers, returning 30.76% and 25.06%, respectively. Low sulfur gas and heating oil were the worst performers, declining -9.27% and -7.51%, respectively.

Fixed Income ⁷

Interest rate changes were mixed in the US Treasury fixed income market during the third quarter. The yield on the 5-year US Treasury note decreased by 3 basis points (bps), ending at 0.31%. The yield on the 10-year US T-note rose by 3 bps to 0.64%. The 30-year US T-bond yield increased by 5 bps to 1.46%. On the short end of the yield curve, the 1-month US Treasury bill yield decreased to 0.08%, while the 1-year T-bill yield decreased by 5 bps to 0.14%. The 2-year US T-note yield finished at 0.09% after a decrease of 2 basis points. In terms of total returns, short-term corporate bonds returned 0.92% for the quarter. Intermediate-term corporates returned 1.33%. The total return for short-term municipal bonds was 0.83%, while intermediate munis returned 1.40%. Revenue bonds outperformed general obligation bonds.

Global Fixed Income

Changes in government bond interest rates in the global developed markets were mixed for the quarter. Longer-term bonds generally outperformed shorter-term bonds in global ex-US developed markets. Short- and intermediate-term nominal interest rates were negative in Japan, while all maturities finished the quarter in negative territory in Germany.

Impact of Diversification ⁸

These portfolios illustrate the performance of different global stock/bond mixes and highlight the benefits of diversification. Mixes with larger allocations to stocks are considered riskier but have higher expected returns over time.

If you have questions or concerns about your long-term strategy, contact me. I am here to help.

Regards,

1. Past performance is not a guarantee of future results. Indices are not available for direct investment. Index performance does not reflect the expenses associated with the management of an actual portfolio. The S&P data is provided by Standard & Poor's Index Services Group. Frank Russell Company is the source and owner of the trademarks, service marks, and copyrights related to the Russell Indexes. MSCI data © MSCI 2020, all rights reserved. Dow Jones data © 2020 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved. S&P data © 2020 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved. Bloomberg Barclays data provided by Bloomberg. Treasury bills © Stocks, Bonds, Bills, and Inflation Yearbook™, Ibbotson Associates, Chicago (annually updated work by Roger G. Ibbotson and Rex A. Sinquefield).


2. Past performance is not a guarantee of future results. Indices are not available for direct investment. Index performance does not reflect the expenses associated with the management of an actual portfolio. Market segment (index representation) as follows: Marketwide (Russell 3000 Index), Large Cap (Russell 1000 Index), Large Cap Value (Russell 1000 Value Index), Large Cap Growth (Russell 1000 Growth Index), Small Cap (Russell 2000 Index), Small Cap Value (Russell 2000 Value Index), and Small Cap Growth (Russell 2000 Growth Index). World Market Cap represented by Russell 3000 Index, MSCI World ex USA IMI Index, and MSCI Emerging Markets IMI Index. Russell 3000 Index is used as the proxy for the US market. Dow Jones US Select REIT Index used as proxy for the US REIT market. Frank Russell Company is source and owner of trademarks, service marks, and copyrights related to Russell Indexes. MSCI data © MSCI 2020, all rights reserved.


3. Past performance is not a guarantee of future results. Indices are not available for direct investment. Index performance does not reflect the expenses associated with the management of an actual portfolio. Market segment (index representation) as follows: Large Cap (MSCI World ex USA Index), Small Cap (MSCI World ex USA Small Cap Index), Value (MSCI World ex USA Value Index), and Growth (MSCI World ex USA Growth Index). All index returns are net of withholding tax on dividends. World Market Cap represented by Russell 3000 Index, MSCI World ex USA IMI Index, and MSCI Emerging Markets IMI Index. MSCI World ex USA IMI Index is used as the proxy for the International Developed market. MSCI data © MSCI 2020, all rights reserved. Frank Russell Company is the source and owner of the trademarks, service marks, and copyrights related to the Russell Indexes.


4. Past performance is not a guarantee of future results. Indices are not available for direct investment. Index performance does not reflect the expenses associated with the management of an actual portfolio. Market segment (index representation) as follows: Large Cap (MSCI Emerging Markets Index), Small Cap (MSCI Emerging Markets Small Cap Index), Value (MSCI Emerging Markets Value Index), and Growth (MSCI Emerging Markets Growth Index). All index returns are net of withholding tax on dividends. World Market Cap represented by Russell 3000 Index, MSCI World ex USA IMI Index, and MSCI Emerging Markets IMI Index. MSCI Emerging Markets IMI Index used as the proxy for the emerging market portion of the market. MSCI data © MSCI 2020, all rights reserved. Frank Russell Company is the source and owner of the trademarks, service marks, and copyrights related to the Russell Indexes.


5. Past performance is not a guarantee of future results. Indices are not available for direct investment. Index performance does not reflect the expenses associated with the management of an actual portfolio. Number of REIT stocks and total value based on the two indices. All index returns are net of withholding tax on dividends. Total value of REIT stocks represented by Dow Jones US Select REIT Index and the S&P Global ex US REIT Index. Dow Jones US Select REIT Index used as proxy for the US market, and S&P Global ex US REIT Index used as proxy for the World ex US market. Dow Jones and S&P data © 2020 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved.


6. Past performance is not a guarantee of future results. Index is not available for direct investment. Index performance does not reflect the expenses associated with the management of an actual portfolio. Commodities returns represent the return of the Bloomberg Commodity Total Return Index. Individual commodities are sub-index values of the Bloomberg Commodity Total Return Index. Data provided by Bloomberg.


7. One basis point (bps) equals 0.01%. Past performance is not a guarantee of future results. Indices are not available for direct investment. Index performance does not reflect the expenses associated with the management of an actual portfolio. Yield curve data from Federal Reserve. State and local bonds are from the S&P National AMT-Free Municipal Bond Index. AAA-AA Corporates represent the ICE BofA US Corporates, AA-AAA rated. A-BBB Corporates represent the ICE BofA US Corporates, BBB-A rated. Bloomberg Barclays data provided by Bloomberg. US long-term bonds, bills, inflation, and fixed income factor data © Stocks, Bonds, Bills, and Inflation (SBBI) Yearbook™, Ibbotson Associates, Chicago (annually updated work by Roger G. Ibbotson and Rex A. Sinquefield). FTSE fixed income indices © 2020 FTSE Fixed Income LLC, all rights reserved. ICE BofA index data © 2020 ICE Data Indices, LLC. S&P data © 2020 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved


8. STDEV (standard deviation) is a measure of the variation or dispersion of a set of data points. Standard deviations are often used to quantify the historical return volatility of a security or portfolio.

Diversification does not eliminate the risk of market loss. Past performance is not a guarantee of future results. Indices are not available for direct investment. Index performance does not reflect expenses associated with the management of an actual portfolio. Asset allocations and the hypothetical index portfolio returns are for illustrative purposes only and do not represent actual performance. Global Stocks represented by MSCI All Country World Index (gross div.) and Treasury Bills represented by US One-Month Treasury Bills. Globally diversified allocations rebalanced monthly, no withdrawals. Data © MSCI 2020, all rights reserved. Treasury bills © Stocks, Bonds, Bills, and Inflation Yearbook™, Ibbotson Associates, Chicago (annually updated work by Roger G. Ibbotson and Rex A. Sinquefield).