In Canada, the S&P/TSX Composite Total Return Index carried on with its strong rebound before stumbling in September, finishing with a return of 4.7%, including dividends in the third quarter. Following the sharpest quarterly contraction in GDP on record, U.S. equity markets continued their strongest rally from a bear market in history. The S&P 500, Dow Jones and Nasdaq all surpassed their pre-COVID highs, respectively jumping 8.9%, 8.2% and 11.2% in U.S. dollar terms, on a total return basis during the third quarter. In overseas markets, international equities rallied 4.9 % in U.S. dollar terms as measured by the MSCI EAFE Index, including dividends during the same period.
Here’s a look at some of the issues that made their mark this quarter:
- Coronavirus. Worldwide markets reacted to improvements in COVID-19 cases for much of the quarter, looking to better days ahead. The U.S. economy has started to reopen and recover and is likely no longer in a recession. We’re starting to see a second wave of COVID-19 cases in Canada, Europe and other regions while the U.S. is still deep in its first wave. Uncertainty over what the economic consequences will be, and the potential for a vaccine and its global distribution will likely lead to increased volatility.
- Seasonality. September is typically the worst month in terms of performance, and this year was no exception. Since 1950, September has recorded the worst monthly return on average for the S&P 500 Index. International equities also wavered during September.
- Oil. The price of oil was essentially flat for the quarter, at approximately US$40 a barrel as measured by West Texas Intermediate (WTI). A lower demand for crude is likely to keep prices below their 2020 highs and may be a drag on the energy sector.
- Interest rates. Global central banks continued their monetary policy support, maintaining short-term interest rates near historical lows.
- Geopolitical issues. Renewed fears surrounding the Brexit deal hampered returns across Europe, while better than expected economic data out of China during the third quarter, buoyed equity markets in Asia. Renewed trade tensions between China and the United States, and the upcoming U.S. election contributed to volatility.
The next couple of months may be particularly unstable with the U.S. election coming in November. In presidential election years since 1952, October holds the worst monthly average return for the S&P 500. But in years following an election, the S&P 500 has averaged 11.4%, regardless of the election outcome. We need to remember to put political emotions aside when making investment decisions.
The great pause has given way to a recovery, but we believe this recovery has three stages: alarm, resistance, and exhaustion. If we’ve entered the exhaustion phase, as we believe, then we should expect market returns to be average over the next twelve months.
A bright light may be in emerging markets, as earnings momentum seems to be stronger in China, Korea, and Taiwan than elsewhere in the world.
Selectivity and a long-term outlook may be the keys to successful investing globally and here at home. While trying not to sound too optimistic, we believe we will be well on the path to recovery by the end of 2021.