MARKET BRIEFS: Q3 RECAP AND Q4 OUTLOOK

Independent Financial Planning: Needed now more than ever    |   Market Review Q3 2020  |   A new playbook for monetary policy.

A handful of companies provide another strong quarter for the S&P 500
After a strong stock market rebound in Q2 from its low point in Q1, the US stock market’s rebound continues to be driven by six stocks of five large-cap growth companies, popularly known as the FANAMA (Facebook, Apple, Netflix, Amazon, Microsoft and two share classes of Alphabet (aka Google)). The stocks of these five large-cap growth companies enjoyed a year-to-date return of 43.3% while the stocks of the 495 other companies in the S&P 500 returned a mere 0.8% for the same period. The FANAMA stocks carry a higher price/earnings multiple because the growth of their earnings is either insulated from, or benefits from, the impact of social-distancing prompted by the coronavirus pandemic. Their low debt ratios also make these companies less risky during a recession.

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• The third quarter started strong, then markets fell in the final month of the quarter, as the elections took center stage along with questions over reopening the economy. However, all equity markets remained in positive territory for the quarter with emerging markets leading the way. An impressive 6-month run for the US equity markets, up 31.3%-- the best since 2009, saw year-to-date returns turn positive at 5.6%.¹
• Two stocks, Apple and Amazon, made up over 10% of the index and drove 25% of the S&P 500 return for the quarter. Outside of these two stocks, the S&P 500 saw some broadening of contribution to returns, as staple companies like Berkshire Hathaway, Procter & Gamble, UPS and Mastercard made it into the top ten contributors. Year-to-date, the dominance of FANAMA – Facebook, Amazon, Netflix, Apple, Microsoft, Alphabet (Google) - remained, contributing 8.9% to the S&P 500 return while the other 494 stocks detracted 3.3%.²

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¹ Source: Morningstar, S&P 500
² Source: Bloomberg

The story

In a speech in August, Federal Reserve Chair Jerome Powell announced the key outcome of the Federal Open Market Committee’s (FOMC) monetary policy framework review: a flexible form of average inflation targeting (AIT). At the same time, the FOMC released an updated Statement on Longer-Run Goals and Monetary Policy Strategy. The new statement included inflation-friendly revisions to the FOMC’s approach to both its employment and inflation objectives.

The announcement was initially met with skepticism from capital markets, with investors voicing concern about the potential for runaway inflation and a decline in the value of the US dollar.

The reality

In the slow-growth, low-inflation environment in place since the end of the Global Financial Crisis, the Fed’s preemptive approach created uncertainty and equity market volatility.

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