The third quarter of 2020 produced the second consecutive quarter of notable market gains, with volatility (as measured by the CBOE Volatility Index or “VIX”) decreasing consistently throughout the quarter.
Behind the headline numbers, however, there was still cause for concern. Three large themes emerged during the quarter, especially during the latter half. First, U.S. dollar weakness beginning late March reversed course and strengthened 1.9 percent in September. In our view, U.S. dollar strength signaled that effects of monetary stimulus began to wane. Second, expectations for another round of fiscal stimulus appeared to fade quickly in September, which lead to increased equity market volatility. Finally, the sluggish recovery in jobs and announcements of additional job cuts indicated structural damage to the labor market.
July kicked off the third quarter with a bang as stocks surged throughout much of the month. Investors were encouraged by solid employment growth, a rise in personal income and consumer spending, a surge in the housing sector, and an increase in industrial production. All news was not positive, however. The second-quarter gross domestic product fell more than 31% and many states saw an increase in the number of reported COVID-19 cases. Nevertheless, investors stayed with equities, pushing values higher for the fourth consecutive month.
The positive run for stocks continued in August, as major benchmark indexes advanced. Throughout the month, states struggled to settle on appropriate protocols for reopening schools. Testing for the virus increased, and the number of reported COVID-19 cases and deaths rose.
September saw stocks fall on waning hopes of a second round of stimulus. Also, discord between the United States and China ramped up following President Trump’s threatened recourse against American companies that create jobs overseas or that do business with China. Technology shares took a sizable hit, particularly early in the month. September saw several days of favorable returns, likely due to bargain hunters. Unfortunately, there weren’t enough buyers to prevent the benchmark indexes from falling lower by the end of each week of the month.
Looking ahead, uncertainty looms large. And if an unclear economic growth outlook, timing and amount of fiscal stimulus, and political concerns were not enough, corporations will release third quarter earnings in the coming weeks. With an abundance of macroeconomic and political risks fraying investor resolve, we advocate for maintaining an established strategic asset allocation rooted in long-term fundamentals. We encourage investors to keep their investment horizon in focus and to not allow emotions to influence portfolio positioning. Please contact your Azzad advisor if you have questions about your accounts.
Thank you for your continued trust and investment.