Global asset classes continued their stimulus-fueled recovery throughout the summer, incredibly posting all-time highs among major US stock indices by early September. Economic readings also ended the quarter on firmer footing, although in less convincing fashion than the strong market action may have otherwise suggested.

While the historic market rebound off the mid-March lows was virtually unabated, stocks did take pause in late September alongside persistently high volatility readings, highlighting elevated sensitivity towards delays in COVID-19 vaccine progress, extended stimulus negotiations, and the rather bizarre nature of the upcoming US national election cycle.

During the third-quarter, the S&P 500 index advanced another +9.0% (ETF proxy SPY*), edged out just slightly by Emerging Market stocks, up +10.9% (IEMG). Like the prior quarter; however, just a small fraction of large-cap technology stocks again led the way, leaving value stocks and broader market indices behind on the year. As an otherwise “everything higher” quarter, bonds also advanced just under one-percent. In fact, the US Federal Reserve’s “lower for longer” accommodation policy drove bonds to provide the highest annual returns among our major tracked asset classes (CNBC, “Powell announces new Fed approach…,” 8.27.20).

This historic policy shift allows for more leeway around future inflation to support the labor market. At the same time, Chairman Powell recently advocated for further fiscal stimulus to avoid the rebound from faltering (CBS, Fed chair… pushes for more stimulus…,” 10.6.20). Underscoring his point, the US added fewer jobs than anticipated for September (BBC, “US jobs growth slower than expected…,” 10.2.20). It is no wonder that markets have responded sharply to every shift in tone on the highly politicized negotiations. Finally, both Global Real Estate and Commodities rose higher by +2.0% (RWO) and +6.1% (DBC), respectively. However, unlike stocks and bonds, they both remain deeply lower on the year, perhaps more accurately reflecting the variety of post-pandemic uncertainties that remain.

While the return to new market highs has been an unexpected bonus, the relatively weak economic backdrop only underscores the key nature of the upcoming elections. After an election, stock market returns tend to be slightly lower than the prior year. As suggested above, that may differ next year depending on the likelihood and timing of further stimulus. When the dominate party changes hands, market gains average +5%, although when the White House is retained, gains are higher still at +6.5% (US Bank, “How presidential elections affect [stocks]…,” 10.20). That said, political gridlock scenarios tend to be most market friendly, which may be particularly true this cycle with major tax policy differences on the table. Otherwise in the event of a clean sweep, expect short-term volatility ahead. Whatever the outcome, our model exposures are designed to adapt to the changing market conditions. Enjoy the fall, and get out the vote!

* Not Individual Investment Advice; Dividend-adjusted proxy ETP data from Commodity Systems, Inc. & Allocations as of September 30, 2020 may not apply to all clients; CA360 assumes no duty to update any information in this presentation for subsequent changes of any kind.