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Market Commentary

October 2020 Market Commentary: Another Looming Lockdown on the Horizon?

Data Source: Bloomberg

To read full market commentary, click here.

October 2020 Highlights:

• Although early October saw a recovery from the September equity market pullback, global equity markets subsequently weakened over rising COVID-19 cases across North America and Europe. MSCI All-Country World Index (ACWI), ended October down 2.4% with Asian equities outperforming the rest of the world, as Asia Pacific has enjoyed a pullback in active COVID cases as well as experiencing stronger global trade activity.
• As temperatures drop across the Northern Hemisphere, 2^nd wave COVID-19 outbreaks are spreading across both North America and Europe, resulting in renewed social lockdowns and restrictions. According to John Hopkins, global deaths tied to COVID-19 have now surpassed 1.2 million as death rates surge to levels not seen since last April.  Total global cases have surpassed 46.6 million.  With lockdowns looming, debate has shifted towards the rollout and endorsement of mass testing with a tradeoff between expediency versus accuracy.
• MSCI Asia ex Japan and Emerging Markets returned 2.4% and 2.1%, respectively, while MSCI Japan was down 1.6%, S&P 500 down 2.7%, and MSCI Europe down 5.6%. Sentiment around Europe has soured as reflected by weak equity and currency performance. Sovereign bond yields have deepened further into negative rate territory as the continent is suffering from an acceleration in COVID cases as well as concerns over a no trade deal ‘hard BREXIT’ with the United Kingdom.
• S. stocks had performed well going into 3Q earnings season but then modestly pulled back as even earnings beats from key technology bellwethers did not exceed heightened expectations. According to the 10/30/2002 edition of Factset Earnings Insight, 3Q releases (64% of S&P companies so far) have largely exceeded expectations as companies continue to recover from the March-May pandemic shutdown.  For CY 2020, analysts are projecting an earnings decline of 15.5% (revenue -2.3%) followed by an anticipated recovery in CY 2021 with expected earnings growth of 23% (revenue +7.9%).
• Emerging market performance masks an increased bifurcation between China (now above 40% of index weight) and broader Asia versus Latin America, Eastern Europe, and Middle East/Africa. The latter are still wrestling with COVID-19 cases and low oil prices while the former are benefiting from a stimulus-fueled recovery in China and global trade flows, especially around technology.
• As COVID cases reaccelerate across North America, we are waiting for the latest news on late stage trials for vaccine and antibody treatments. According to Apollo Global, there are more than 200 vaccine candidates under development.  This past weekend also saw some promising early stage trial vaccine results released by CureVac using the modified RNA approach.
• With the November election looming today, investors are hoping for a 2^nd fiscal relief package to be passed soon after the election, although both political parties remain divided over the size and scope of the 2^nd package estimated at $2 trillion. Besides the proposed funding amount, key differences remain over testing and tracing and childcare.
• Economists are warning of an economic cliff-drop if another relief package is not passed soon as the U.S. economy is facing several headwinds such as 2^nd wave COVID cases, slowing job growth, and ongoing financial stress faced by key industries directly affected by the virus such as airlines, traditional retailers, and state/local municipalities.
• Current and former officials from the U.S. Federal Reserve and European Central Bank have strongly lobbied for fiscal spending to help close the economic slack resulting from the pandemic. In a Bloomberg opinion article, former Fed official Bill Dudley maintains that the monetary toolbox has been largely exhausted and that the “US Federal Reserve is very near that point.”  This suggests that any additional quantitative easing measures such as ‘zero for longer’ interest rates, increased expansion of the Fed balance sheet, and outright yield control “would not provide much additional support to the [US] economy.”
• Stock market reaction following 3Q earnings releases was mixed for premium growth technology and consumer discretionary stocks. The technology sector was the worst performer among the major economic sectors while consumer discretionary and communication services benefited from strong earnings releases from dominant companies within their respective sectors such as Amazon, Google, and Facebook.  In addition, streaming services such as Netflix are flexing their pricing power amidst the pandemic stay-at-home environment.
• Once again, this month saw value stocks and small cap stocks revert back from their 2-year running underperformance versus growth and large caps, respectively, only to give back a chunk of this outperformance later in the month. However, value still outperformed growth with S&P Pure Value returning 1.7% versus -1.8% for Pure Growth while small caps (S&P 600) outperformed large caps (S&P 500), returning 2.6% versus -2.7%, respectively.
• It was a mixed month for sector performance as sector performers did not follow an intuitive style or cyclical pattern. Utilities (a defensive sector) ran well ahead of the other sectors with communication services, materials, financials, and industrials outperforming the broader market while health care, energy, and technology lagged.
• Among factors, we saw a rare reversal with Momentum and High Quality underperforming Value, High Dividend, and Minimum Volatility although the return dispersion was not that great. Have we seen a pause in the manic-driven momentum trade post March bear market, or is Momentum’s recent underperformance indicative of a shift in market leadership?
• The U.S. Bloomberg/Barclays Aggregate Index returned -0.4% for the month. Investment-grade fixed income was hurt by a rise in longer maturity interest rates with the 10-Year US Treasury rising to an intramonth high of 0.87% despite equity market volatility that would normally see investors flock to the safety of U.S. Treasuries. However, despite credit spreads widening with the equity pullback, U.S. high yield managed to buck this month’s sell-off in equities and Treasuries, as the Bloomberg Barclays High Yield Index returned 0.5% for the month while emerging market and non-U.S. fixed income also had positive returns for the month.
• Commodities and U.S. REITs both underperformed global equities as the former was weighed down by a month-end sell-off in oil prices while the latter remains depressed due to COVID-19 restrictions. GSCI Commodities returned -3.6% although Precious metals (-0.7%) benefited from risk-off selling as gold prices partially recovered their recent sell-off.  After trading above $40/barrel for the last several months, oil prices (3-month futures) broke key support levels ending at $36/month as renewed COVID lockdowns are expected to weigh on transportation demand while Libya is expected to reopen production which will only add to the global supply picture.

To read full market commentary, click here.