September 2020: Global Equity Markets Review
The U.S. equity market gave back some of its recent gains in September. The S&P 500 Index declined 3.9% which was the first monthly drop since the watershed decline in March.
Broader U.S. indexes also mirrored the S&P 500 pattern although with some notable differences. Non-U.S. equity markets generally fared better with smaller losses for the month. Factors attributed to the lagging performance of U.S. stocks in September include uncertainty over the impending national election as well as a sharp sell-off in technology stocks. It is this latter point which often goes unnoticed when comparing U.S. and non-U.S. indexes. For example, the Technology sector weight in the S&P 500 is over 24% resulting in double the 12% sector weight in Technology represented in the MSCI ACWI ex U.S. index. A sustained shift in leadership away from U.S. based mega cap technology stocks will also impact the relative returns of global equity benchmarks.
We have detailed in past letters how remarkable 2020 has been regarding patterns of performance. September was no different although the dramatic shifts last month were obscured by the overall decline. Those market segments and indexes which underperformed in June and July were standout performers in September. It is no surprise the heightened level of uncertainty in pandemic outcomes, as our economy and the national election have combined to create a frenetic pattern among winners and losers in the stock market. This is particularly evident when comparing the contribution to the S&P 500 return between August and September. Last month we detailed how 5 technology stocks contributed 42% of the positive index return for August. This month, 5 technology stocks (4 the same as August) represented 47% of the decline in September as illustrated in the graph below.
As we enter the 4th quarter of 2020, the outcome of the election will be known shortly and will remove one uncertainty which impacted the markets in September. In addition, numerous human trials are underway testing the efficacy of a vaccine for COVID-19. It is our expectation with each passing day the global health community will be successful in their efforts. However, much has yet to be determined on the speed and priority of which successful vaccine can be distributed in addition to a therapeutic helping to prevent a repeat of COVID-19 in 2021. In the meantime, troubling second wave concerns both here and abroad raise the stakes on the timetable for effective immunity. In addition, the economic damage already witnessed is at risk of a lengthier recovery the longer our mobility is restrained over virus concerns. These crosscurrents suggest to us the volatility in index returns - as well as leadership within markets - is not over as we close out 2020. Diversification within and across markets should be emphasized.
Index Returns – all shown in US dollars
All returns shown trailing 9/30/2020 for the period indicated. “YTD” refers to the total return as of prior-year end, while the other returns are annualized. 3-month and annualized returns are shown for:
- The S&P 500 index is comprised of large capitalized companies across many sectors and is generally regarded as representative of US stock market and is provided in this presentation in that regard only.
- The S&P 500® Equal Weight Index (EWI) is the equal-weight version of the widely-used S&P 500. The index includes the same constituents as the capitalization weighted S&P 500, but each company in the S&P 500 EWI is allocated a fixed weight - or 0.2% of the index total at each quarterly rebalance. The S&P 500 equal-weight index (S&P 500 EWI) series imposes equal weights on the index constituents included in the S&P 500 that are classified in the respective GICS® sector.
- The S&P 500 Growth Index is comprised of equities from the S&P 500 that exhibit strong growth characteristics and is weighted by market-capitalization.
- The S&P 500 Value Index is a market-capitalization weighted index comprising of equities from the S&P 500 that exhibit strong value characteristics such as book value to price ratio, cash flow to price ratio, sales to price ratio, and dividend yield.
- The Russell 3000 Index tracks the performance of 3000 U.S. corporations, determined by market-capitalization, and represents 98% of the investable equity market in the United States.
- The Russell Mid Cap Index measures the mid-cap segment performance of the U.S. equity market and is comprised of approximately 800 of the smallest securities based on current index membership and their market capitalization.
- The Russell 2000 Index is a market-capitalization weighted index that measures the performance of 2000 small-cap and mid-cap securities. The index was formulated to give investors an unbiased collection of the smallest tradable equities still meeting exchange listing requirements.
- The MSCI All Country World Index provides a measure of performance for the equity market throughout the world and is a free float-adjusted market capitalization weighted index.
- The MSCI EAFE Index is a market-capitalization weighted index and tracks the performance of small to large-cap equities in developed markets of Europe, Australasia, and the Far East.
- The MSCI Emerging Markets Index is a float-adjusted market-capitalization index that measures equity market performance in global emerging markets and cannot be purchased directly by investors.
- The S&P Global BMI sector indices are into sectors as defined by the widely used Global Industry Classification Standards (GICS) classifications. Each sector index comprises those companies included in the S&P Global BMI that are classified as members of respective GICS® sector. The S&P Global BMI Indices were introduced to provide a comprehensive benchmarking system for global equity investors. The S&P Global BMI is comprised of the S&P Emerging BMI and the S&P Developed BMI. It covers approximately 10,000 companies in 46 countries. To be considered for inclusion in the index, all listed stocks within the constituent country must have a float market capitalization of at least $100 million. For a country to be admitted, it must be politically stable and have legal property rights and procedures, among other criteria.
- The Barclay’s US Aggregate Index, a broad based unmanaged bond index that is generally considered to be representative of the performance of the investment grade, US dollar-denominated, fixed-rate taxable bond market.
- The Bloomberg Barclay’s US Corporate High Yield Index, which covers the USD-denominated, non-investment grade, fixed-rate, taxable corporate bond market.
An index is a portfolio of specific securities, the performance of which is often used as a benchmark in judging the relative performance to certain asset classes. Index performance used throughout is intended to illustrate historical market trends and performance. Indexes are managed and do not incur investment management fees. An investor is unable to invest in an index. Their performance does not reflect the expenses associated with the management of an actual portfolio. No strategy assures success or protects against loss. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk. All investing involves risk including loss of principal. Investing in stock includes numerous specific risks including: the fluctuation of dividend, loss of principal, and potential liquidity of the investment in a falling market. Past performance is no guarantee of future results.
Key Indicators correspond to various macro-economic and rate-related data points that we consider impactful to equity markets.
- The US 10-Year Treasury Yield (%)/bps, is the return on investment for the U.S. government’s 10-year debt obligation and serves as a signal for investor confidence.
- SPDR Gold Trust Price ($), is an investment fund that reflects the performance on the price of a gold bullion, less the Trust’s expenses.
- West Texas Intermediate, which is an oil benchmark and the underlying asset in the New York Mercantile Exchange’s oil futures contract.
- CBOE Volatility Index (Level)/% Change, which uses price options on the S&P 500 to estimate the market's expectation of 30-day volatility.
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