In the latest installment of our quarterly newsletter, we share our observations on the third quarter of 2020 and our outlook. Click here to go to the full report on our website. Following are highlights:
- For the third quarter, the S&P 500 index returned 8.9% including dividends and ended September up 5.6% for the year.
- We have been both impressed and a bit surprised by the stock market’s resilience. While we did expect stocks to recover from their initial drop, the rally continued steadily for months despite worrisome signs during the third quarter related to the ongoing pandemic and economic recession.
- Hiring by businesses caused the unemployment rate to drop to 7.9%, after peaking at nearly 15% in April. Even after the recent additions, however, more workers have lost their jobs than in the 2008-2009 financial crisis, and only about half of the 22.2 million people laid off or furloughed in the early days of the pandemic have returned to work.
- Reports during the third quarter confirmed the dramatic economic impact of the surge in COVID-19 cases in the United States and abroad and the resulting restrictions on activity. Second quarter GDP declined 31.4% after dropping 5% in the first quarter.
- Corporate earnings fell 32% in the second quarter. Corporate earnings are likely to be 21% lower in the third quarter and 12% lower in the fourth compared to last year. However, analysts currently expect a 26% uptick in 2021 as the economy regains its footing and comparisons are to 2020’s depressed levels.
- The U.S. Federal Reserve remained steadfast in its commitment to supporting the economy and revised its policy to allow inflation to rise for longer before triggering a Fed move to increase interest rates. Meanwhile, disagreement over the size and details of another stimulus measure has prevented Congress and the White House from offering additional relief that we were hoping to see.
- Economists expect GDP to rise in the third quarter compared to the second at an annual rate of around 24%. However, we believe unemployed workers will need substantial additional help from Congress and the White House, and we are disappointed by the lack of support so far. Without further action, a decrease in consumer spending across a broad swath of the population will likely leave the United States mired in an economic downturn.
- The upcoming elections will be the primary focal point for the next several weeks, and the heated rhetoric and strong emotions portend more volatility in the markets until we get a clear resolution of the outcome. Despite what many people believe, the stock market has performed well during presidential terms no matter which party occupies the White House.
- We have confidence in our nation and our markets, and we know we will emerge from the current situation and resume economic growth. In the meantime, we are largely sticking with our long-term investment strategy, and we are investing some cash to take advantage of current opportunities.
The Edgemoor Team
