Stocks broadly advanced in the third quarter of 2020. The S&P 500, Dow Jones Industrial, and Nasdaq Composite gained 8.9%, 8.2% and 11.2% respectively during the period ending September 30th. Global markets advanced as well with the MSCI Emerging Market Index rising 9.6% and the MSCI World advancing 8.1%. Small cap US stocks lagged rising just 3.2% as value heavy sectors such as banks and energy weighed on returns. All sectors of the S&P 500 had gains in the third quarter except for energy, which fell nearly 20%.
Equities tied to the US consumer performed especially well in the quarter with Apple, Nike, McDonalds, Walmart, and Home Depot among the best performing stocks in the S&P 500. It’s difficult to point to a specific reason for continued equity performance, but a backdrop of falling interest rates, easy monetary policy, and a hope for a second fiscal stimulus are likely the primary drivers.
What’s clear is that the recovery in the stock market has reflected a “K shaped” recovery where certain segments of the economy and stock market continue to thrive, while the remainder languishes. As such, the U6 unemployment measure stands at 12.8% in September. U-6 is calculated as unemployed plus marginally attached workers plus part-time for economic reasons. This figure is nearly double the rate seen last December and shows there’s still significant economic impact from COVID-19. Access to capital is similarly uneven right now. While the largest corporations now enjoy borrowing costs below 1%, many small businesses have had to shut down due to economic disruptions and a lack of access to capital. We continue to see this “K shaped” recovery play out with many corporations enjoying an even greater competitive position than before COVID, while many other businesses and people are in tragic circumstances that will require substantial assistance. Given this backdrop, risk free interest rates in the United States remained at historically low levels. The 10-year US Treasury yield closed the quarter at 0.68% while the 2-year yield sat at 0.12%.
ALTERNATIVE INVESTMENT COMMENTARY*
Hedge Funds extended their upward trend during the third quarter as the HFRI Fund-of-Funds Composite Index increased by 4.2%. Specifically, ‘Equity Hedged’ and ‘Event Driven’ strategies continued to outperform during Q3 as the HFRI Equity Hedged (Total) Index and HFRI Event Driven (Total) Index increased by 5.8% and 4.3%, respectively. U.S. equity markets were among the top performers globally during the quarter amid signs of an economic recovery and loose monetary policy from the Federal Reserve. We were pleased that our core ‘Equity Hedged’ and ‘Event Driven’ managers outperformed their respective HFRI indices during the quarter. We continue to believe that the managers on our platform are well positioned to capitalize on opportunities and preserve capital in risk-off scenarios during the final quarter of the year amid uncertainty for markets and economies globally.
*Data taken from HFRI (Hedge Fund Research Indices) as of October 13th, 2020
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