Q3 market review
The pandemic has now resulted in over a million deaths around the world, a disaster on a scale that is hard to comprehend. Huge economic damage has been caused by measures taken to try to halt the spread of the disease, and to support people and businesses through the crisis. There are signs that survival rates are getting better and progress is being made on developing a vaccine, however, there is no certainty about when a viable vaccine may be approved. The lockdown restrictions in the UK were lifted in the middle of the year, and we saw signs of economic recovery. However, this has been called into question by the second wave of infections seen towards the end of the summer. In the end, a sustained recovery in economic growth may depend on either the development of a vaccine or effective treatment remedies which lower the rate of mortality.
At the start of the quarter, the European Union agreed a €750 billion recovery programme to be deployed next year. However, by the end of the quarter, they continued to debate the details and it appears that implementation of the recovery package could be delayed. Democrats and Republicans in the US have been battling over the next stimulus package as support schemes have wound down. The US election is showing up the bitter divisions in the US electorate and the first presidential debate was chaotic. A deal on the new stimulus could be delayed until after the election, although there seems to have been renewed urgency to deliver some support at the end of the quarter. While Joe Biden leads in the polls, we cannot write off the chance of Donald Trump winning. The incumbent may not accept defeat and is likely to dispute the postal ballots all the way to the Supreme Court.
Q3 2020 index performance
Source: FE analytics
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Central banks continue to keep rates low, support credit markets and provide loans to help businesses through the pandemic. The Federal Reserve (Fed) has said it will now target an average inflation rate of 2% which, after a long period below target, would allow them to keep rates lower for longer even if inflation exceeds 2% for a period of time. The European Central Bank (ECB) may consider following this example and, in the UK, the Bank of England (BoE) has hinted at taking rates negative. Overall, low interest rates are likely to remain in place for a very long time.
Post-Brexit trade negotiations have continued with the “last round” starting at the end of the quarter. It is hard to see that there has been any progress, and the UK Government has put forward a bill that appears to go against some of the terms of the exit agreement. Further negotiations will be needed to get a deal which is in everyone’s interests, but at present it looks as if the transition deal may end without a new trade agreement.
Performance attribution for the quarter
The sharp rebound in the second quarter of the year, from the COVID-19-related decline caused in the first quarter, has continued again this quarter. Once again, it was driven by the US, where the lockdown has been less severe when compared to countries elsewhere. The S&P 500 has risen nearly 9% over the quarter. In addition to the US, China, where normality seems to have resumed, performed extremely well; the Shanghai Composite index rose 8%, while the more IT-heavy Shenzhen index rose 9%.
Technology’s outperformance is true the world over. The US Nasdaq index, which is heavily-weighted towards technology stocks, rose 12% during the quarter. As we mentioned in the second quarter, rather than the pandemic and associated lockdowns changing everything, the trends of recent years have instead sharply accelerated. In the US, e-commerce jumped from 17% to 22% of total retail spending in just a few months and, in the UK, it rose from 20% to 32%. Some of this is reversing as lockdowns have been eased, but most of it is here to stay. We are creatures of habit and, having become accustomed to online shopping, for most of us there is no going back, even as and when the shops that have managed to survive return to ‘normal’.