Quarterly Review: Global Stocks add to 2Q Gains
- Emerging markets posted the highest return for asset classes during the quarter.
- Consumer Discretionary, Materials, and Industrials were the highest performing sectors over the third quarter.
- We remain bullish but focused on selection.
A good quarter for stocks: The third quarter provided investors positive absolute returns across global asset classes (see chart below). Emerging Market equities led all asset classes in the quarter posting a 9.6% total return after trailing US equities in Q2. US Large caps continued to rise after a historic Q2 recovery and returned 8.9% in Q3. Developed International equities (EAFE) posted a 4.9% return in the third quarter, which in isolation was a strong quarter, but in relative terms lagged due to a lower weighting of growth-oriented industries within international markets. Out of the asset classes listed below, bonds were the worst performing during the third quarter as the Bloomberg Barclays US Aggregate index (Fixed Income Investment Grade) rose just 0.6% as 10-year Treasury rates remained roughly unchanged at 0.7%.
Our table below shows the performance of asset classes on the left and US sectors on the right. In each case, we show returns for both the 3rd quarter and the last 12 months (Trailing Twelve Months, TTM). The table is anchored by the performance of US Large-Cap stocks (shaded) so that it is easy to see which asset classes and sectors posted higher and lower returns in each timeframe.
Performance: A Closer Look
Cyclical sectors respond to economic recovery: We believe the main driver for global markets in Q3 was the continued economic recovery from COVID-19 as global economies re-opened. US sector performance showed changing leadership between Q2 and Q3. Energy went from producing the highest returns to producing negative returns, while Industrials and Materials continued to recover and build off their momentum from Q2. Technology continued to climb for the first two months of the quarter, followed by a correction in September. Consumer Discretionary continued its outperformance from Q2 propelled by the resurgence of consumption, online shopping, and home improvement.
We remain bullish: Going forward, we expect stocks to rise over the next 12-18 months, recognizing that short-term risk remains high with the 2020 election looming and continued COVID-19 concerns. Across our portfolios we are slightly overweight equities compared to our benchmarks. From a selection standpoint, we believe asset classes and stocks that can deliver growth should continue to be valued at a premium to their peers. All our portfolios tilt towards US stocks over international equities, due to our current preference for growth-oriented business models such as technology.
Focus on selection: Furthermore, with the post-COVID-19 snapback behind us, we do not anticipate that the tide will rise for all stocks and selection will become increasingly important. In our longer-horizon portfolios we are utilizing more focused ETFs and individual securities to be more selective among countries such as Germany and sectors such as Technology, Healthcare, and Financials. Lastly, we caution investors against getting too bearish ahead of the election. There are several potential catalysts on the near-term horizon including another stimulus bill, further advances in COVID-19 treatment, and 3rd quarter earnings season. It is also important to point out that the S&P 500 has already experienced a pullback in September, ending the quarter roughly 6% lower than its September 2nd high.