2020 Third Quarter Investment Market Report


The investment results in September were certainly nothing to brag about, but overall the markets have done something interesting: large cap indices are up while small and midcap stocks have posted modest losses.  Given the persistent decline in the U.S. economy and the uncertainties around the resurgent pandemic, the investment situation could have been a lot worse.  Is it possible that in the midst of a raging pandemic that is experiencing its second wave, and the associated loss of GDP, that the markets will deliver a positive return for 2020?

The Wilshire 5000 Total Market Index—the broadest measure of U.S. stocks—gained 9.14% in the most recent quarter, and is now hanging onto a 5.54% gain so far this year.  The widely-quoted S&P 500 index of large company stocks gained 8.47% in the third quarter and is now up 4.09% for calendar 2020.

International investors are generally in the red so far this year.  The broad-based EAFE index of companies in developed foreign economies gained 4.20% in the third quarter, but is still down 8.92% for the year.   In aggregate, European stocks gained 4.07% over the last three months, but are sitting on a 10.53% loss for the year.  EAFE’s Far East Index meanwhile, gained 5.21% in the third quarter, but for the year it, too, is in losing territory, down 4.56%.  Emerging market stocks of less developed countries, as represented by the EAFE EM index, gained 8.73% in the most recent quarter, but is still down 2.93% for the year.

Our global equity fund, DFA Selectively Hedged Global Equity (DSHGX) which is comprised of about 50% US stocks and 50% international accordingly finished up 6.84% for the quarter, and is down 3.32% for the year.

Looking over the other investment categories, real estate, as measured by the Wilshire U.S. REIT index, posted a slim 1.25% gain in the third quarter, but real estate investors are still down 16.74% for the year.  DFA Global Real Estate (DFGEX), not an apples to apples comparison with the US index, finished the quarter up 1.95%, and is down 15.78 for the year.

The S&P GSCI index, which measures commodities returns, gained 7.59% in the third quarter, but is still sitting on a 19.72% loss for the year. Our commodity fund, DFA Commodity Strategy (DCMSX), again not an apples to apples comparison as DFA isn’t as concentrated in oil as the index, over-preformed because of its underweight to oil, and finished up 9.49% for the quarter and is  down just 10.43%.

The equity-like portion of our model portfolios found Ironclad Managed Risk (IRONX), a strategy that sells put options on equity indices and exchange traded funds, up 3.67% on the quarter, and is up 1.16% for the year. AQR Style Premia Alternative Fund (QSPIX), a strategy that invests long and short across six different asset groups: stocks of major developed markets, country indices, bond futures, interest rate futures, currencies and commodities based on four investment styles: value, momentum, carry, and defensive, was up 0.30% for the quarter, but is down 19.17% for the year. Rounding out the mix of equity-like funds, LoCorr Managed Futures Strategy (LFMIX), formerly Steben Managed Futures Strategy, had a quarterly gain of 2.64% and is up 0.87% for the year.  We have these funds in our portfolio to produce returns that are not influenced by the equity markets, so they are performing as expected and much of the reason our portfolios are doing so well, relative to those without equity like exposure.

In the bond markets, rates are still scraping along the bottom.  Coupon rates on 10-year Treasury bonds stand at 0.69%, while 3-month, 6-month and 12-month bonds are still sporting coupon rates of roughly 0%.

Our high quality bond funds, DFA Selectively Hedged Fixed Income (DFSHX), closed the quarter up 0.72%, and is up 1.66% for the year. DFA Global Core Plus Fixed Income (DGCFX) was up 2.45% and is up 5.62% for the year. Our Treasury Inflation Protected (TIPs) fund, DFA Inflation Protected Securities (DIPSX) was up 3.30%, a stunning 9.82% for the year, while our high yield bond fund, Vanguard High Yield Corporate (VWEHX), finished the quarter up 3.87%, and is up 11.87% for the year.

In the early days of the pandemic, most economists and market analysts would have been surprised that the investment markets have held up as well as they have at this point in the year.  They would not have been surprised that—as reported by the U.S. Commerce Department—the American economy suffered its sharpest contraction in at least 73 years during the second quarter.  GDP plunged at a 31.4% annualized rate, with consumer spending down 33.2% (annualized).  April alone saw the loss of 20.5 million jobs.  The most optimistic pundits were touting the return of 749,000 payroll jobs in September.  At that rate, a full economic recovery could take years, but we should know more when the third quarter’s economic data is compiled at the end of October.

Will the September declines lead to more losses as we approach the November election?  Nobody can predict the future, of course.  Looking at history, over the last ten times when the S&P 500 dropped at least 3.5% for the month of September, seven of those following Octobers showed gains for the month.  On the other hand, how many times have we seen, as we have recently, stock prices exceeding their earnings by increasing margins?  The road ahead for stocks is uncertain, but when in all of market history has that not been true?

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