The road to recovery? Market reflections for third quarter 2020

In the midst of an unparalleled year, the eventful third quarter of 2020 was perhaps the steadiest period of the year thus far — especially when compared to the historic market decline that marked the first quarter, followed by an equally momentous rebound in the second quarter.

Markets built on the second-quarter rebound and continued to march upward, despite a resurgence in COVID-19 cases and renewed lockdown restrictions in some areas, an improving yet shaky domestic unemployment picture, and an impending U.S. presidential election in November.

To illustrate what a volatile ride we’ve endured this year in the equity markets, the S&P 500 hit a year-to-date low on March 23 of -30.4%, only to rally 47.3% in 191 days, as of September 30.1 While domestic large-cap stocks have exhibited positive year-to-date performance during this period of heightened volatility, other equity asset classes — such as domestic small-cap, developed international and emerging markets — remain in negative territory.

Despite much uncertainty remaining for the economy and financial markets, disciplined and patient investors who maintain a long-term perspective tend to be rewarded.

While fiscal and monetary policy support from central banks and governments around the world continued, investors assessed various economic data points during the quarter — especially as many parts of the U.S. have continued the reopening phase, albeit at a slow pace, from COVID-19-induced lockdowns. The September jobs report revealed that employers added 661,000 jobs in the month, bringing the total jobs the U.S. has replaced to 11.4 million of the 22 million lost in March and April. The unemployment rate is currently 7.9%.2 The pace of hiring slowed considerably in September relative to the summer months, and unemployment remains elevated. Many expect the labor market to take years to fully recover. In addition, consumer spending and household income gains cooled from the summer months.

As we have discussed in previous market reflections, the path forward for the global economy and financial markets continues to be linked directly to the containment and path of the virus.

Third-quarter returns

Third quarter returns
Returns shown in the chart above are for third quarter 2020.

Source: Morningstar®, data as of September 30, 2020. See disclosure page for more information.

Stock performance across the globe

U.S. large-cap stocks, represented by the S&P 500, advanced 8.9% in the third quarter. Within the large-cap segment, growth stocks (Russell 1000 Growth Index, 13.2%) outperformed value stocks (Russell 1000 Value Index, 5.6%) for the quarter.

Small-cap stocks, represented by the Russell 2000 Index, were up 4.9%, underperforming U.S. large-cap stocks for the quarter. Within small caps, value stocks (Russell 2000 Value, 2.6%) also lagged growth stocks (Russell 2000 Growth Index, 7.2%) during the third quarter.

On the international front, the MSCI EAFE Index advanced 1.2% in local currency terms and finished up 4.8% in U.S. dollar terms. A decline in the U.S. dollar relative to other currencies boosted returns for U.S. investors in international markets.

Emerging-markets stocks posted the best performance across asset classes this quarter. The MSCI Emerging Market Index was up 8.7% in local currency terms and 9.6% in U.S. dollar terms. Some of the best-performing emerging-market countries during the third quarter were China, India and South Korea. China, the largest constituent in the MSCI Emerging Market Index, was buoyed by a further rebound in manufacturing and service activity.3

World asset classesSource: Morningstar®, data as of September 30, 2020. See disclosure for more information.

Bond performance across the globe

The bond market experienced positive performance during the sustained risk-on environment in the third quarter. As credit spreads continued their narrowing trend from the second quarter, the lower quality segments of the bond market outperformed the higher quality segments.

The 10-year nominal treasury bond yield increased 0.03% to end the quarter at 0.69%. As the Federal Reserve has stated that it does not expect to raise the federal funds rate from the near zero-lower bound until 2023 — or at least until labor market conditions return to full employment and inflation is on track to moderately exceed 2% for some time — yields at the short end of the U.S. yield curve modestly decreased and remained at low levels during the quarter.4 Yields at the long end of the U.S. yield curve increased during the quarter as the 30-year nominal treasury bond yield rose 0.05% to finish at 1.46%. Thus, the U.S. yield curve continued its steepening trend during the third quarter, possibly indicating improved growth prospects for the economy.

The Bloomberg Barclays Aggregate Index, representing investment-grade U.S. bonds, gained 0.6% for the third quarter. Municipal bonds, represented by the Bloomberg Barclays Municipal 1–10Y Index, posted a 1.1% gain during the quarter.

With rising commodity prices providing a tailwind for the second consecutive quarter, emerging-market debt prices advanced during the third quarter. The JPM EMBI Global Diversified TR Index, representing bonds denominated in U.S. dollars issued by emerging-market governments, returned 2.3% for the quarter. High-yield bonds (represented by ICE BofAML BB-B US CP HY Index) also posted gains and finished up 4.3% as credit spreads narrowed.

Discipline in the midst of uncertainty

As if COVID-19 and the implications of the pandemic haven’t created enough anxiety for investors, the approaching U.S. presidential election adds an additional layer of uncertainty.

We recently shared a brief video highlighting factual data that reveals why elections have not historically had a material impact on financial markets, contrary to what the media projects and many may believe. Even though policy differences will always exist between political candidates and parties, the markets tend to reward investors who remain resolute during all types of political climates.

Additional fiscal and monetary stimulus measures are another variable worth monitoring as the year progresses. While the Federal Reserve has been unwavering in signaling support for the economy and markets through various lending facilities and programs, the fiscal side of the equation has been less  predictable. The ongoing debate between Democrats and Republicans regarding the size and scope of the next round of fiscal stimulus has dragged on throughout the third quarter. Several key differences remain between the two sides, both in terms of the overall size of the package, as well as specific terms of the deal, such as funding for state and local governments and additional unemployment benefit provisions.

All in all, we certainly acknowledge that 2020 has been a trying time for numerous individuals on many fronts. From a financial perspective, even when facing elevated uncertainty and periods of high market volatility, it’s important to keep your focus on what you can control. Sticking to your financial plan and remaining invested in a globally diversified portfolio will help allow you to be successful in achieving your distinct long-term goals and objectives.

At Wipfli Financial Advisors, we can help you develop a financial plan and a well-diversified portfolio to help you achieve your long-term goals. Visit to learn more, or contact us to get started.


Market reflections for third quarter 2020

U.S. Stock Market: Russell 3000 Index
International Developed Stocks: MSCI EAFE NR Index
Emerging Markets Stocks: MSCI EM NR Index
U.S. Bond Market: Bloomberg Barclays Aggregate Index
Emerging Markets Bonds: JPM EMBI Global Diversified TR Index
Large Cap U.S. Stocks: S&P 500 Index
Small Cap U.S. Stocks: Russell 2000 Index
Int-Term Municipal Bonds: BBgBarc Municipal 1-10Y Blend 1-12Y Index
High Yield U.S. Bonds: ICE BofA BB-B US CP HY Constrained Index

Return data represent past performance and are not indicative of future results. Historical returns of indices do not reflect applicable transaction, management or other applicable fees, the incurrence of which would decrease historical performance results. Index information has been compiled by Wipfli Financial from sources Wipfli Financial deems reliable, but has not been independently verified. Historical performance results for investment indices and/or categories have been provided for general comparison purposes only. Indices are unmanaged. It is not possible to invest directly into an index. Any charts and graphs represented herein are for informational purposes only and cannot in and of themselves be used to determine which securities to purchase or sell, or when to purchase or sell securities.

Source: © [2019] Morningstar. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. Past performance is no guarantee of future results.

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The road to recovery? Market reflections for third quarter 2020

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