Third Quarter 2020 In Review
Summary
Well, the third quarter is behind us. We just have to make it through three more months and then we can put 2020 behind us...unless, as in the comedy Palm Springs, this turns out to be "one of those infinite time-loop situations you might have heard about". Let's hope not.
The financial market performed surprisingly well during July and August. Unfortunately, September must have been sponsored by Debbie Downer because everything went south. Could this be attributed to The September Effect, which I wrote about last month? I don't know, but it's certainly another data point in favor of that particular market anomaly.
On the bright side, the first few days of October have given investors some positive returns. Will the trend continue? I don't know. My guess is that the rollercoaster ride will continue, especially as Election Day approaches. Uncertainty, which is still my contender for Word of the Year, isn't going away anytime soon. Hang in there.
Third Quarter 2020 Numbers
The average diversified U.S. stock fund, which is a better measure of how we invest than the S&P 500 or the Dow, gained more than 7% during the third quarter. In case you've forgotten, the average U.S. stock fund was down 25% during the first quarter and then up 24% during the second quarter. This is remarkable considering we're still in the middle of a pandemic and a train wreck of an election. Investors, justifiably spooked, pulled $121 billion from US stock funds during the third quarter.
International stocks fared about the same: The average diversified international stock fund rose nearly 7%, which follows a loss of 23% during the first quarter and a gain of 18% during the second quarter. Investors demonstrated more confidence in international stocks funds by pulling out only $17 billion out of those funds during the third quarter.
The average intermediate-term bond fund gained almost 1.0% during the third quarter, which added to its gain of 0.4% during the first quarter and 5% during the second. In a flight to safety, investors plowed nearly $218 billion into bond funds during the third quarter.
Returns By Broad Category
Need a magnifying glass to read this? No problem. Here's a link to a PDF of this chart.
The chart above provides a high-level view of how the broad asset categories have fared annually from 2017 - 2019, monthly from January - September 2020 and year-to-date 2020.
I love this chart and always look forward to seeing the updated version. Two takeaways:
Notice any patterns? If you answered "yes", we need to talk because your brain operates on a different level than mine. It's impossible to consistently predict which categories will perform best from year-to-year or month-to-month.
This chart is Exhibit A for why it's prudent to build diversified portfolios. Sadly, diversification means you're always having to say you're sorry because it's rare for every category to produce positive returns.
How Will The Election Affect The Market?
Every journalist, pundit, politician, and Average Joe/Jane has an opinion about how the election and the next president will affect the financial market. The reality is that no one knows what's going to happen in the coming weeks and beyond. Below, you'll find some information about what has happened in the past and what could be in store for investors:
What History Tells Us About U.S. Presidential Elections and the Market by Dimensional Fund Advisors:
It's natural for investors to look for a connection between who wins the White House and which way stocks will go. But as nearly a century of returns shows, stocks have trended upward across administrations from both parties.
Shareholders are investing in companies, not a political party. And companies focus on serving their customers and growing their businesses, regardless of who is in the White House.
U.S. presidents may have an impact on market returns, but so do hundreds, if not thousands, of other factors - the actions of foreign leaders, a global pandemic, interest rate changes, rising and falling oil prices, and technological advances, just to name a few.
Here's an interactive PDF produced by Dimensional that shows how the market has performed under every president from 1929 to today
Indecision 2020: The Potential for a 2000 Election Night Reboot by Matthew J. Bartolini, head of SPDR Americas Research
Bartolini does a deep dive into how a delayed election result might play out
A Few Reminders
Wear a mask.
Wash your hands.
Get some exercise. Every. Day.
Limit your social media intake.
Vote.