The third quarter of the year ended on Wednesday when we saw the stock market recovery continue. The market as represented by the S&P 500 index, was up nearly 9% for the quarter and is up about 5.5% for the year.
As we have mentioned several times in previous articles, the market rally has been led by the technology sector. Technology stocks that are part of the S&P 500 returned nearly 12% for the third quarter, and are up nearly 29% for the year. The top five companies in the S&P 500 Index that consist of Facebook, Amazon, Apple, Microsoft, and Google, have had an average return of over 40% year to date. Without these five companies, the other 495 companies in the S&P 500 Index are collectively down in value for the year.
Our investment team sees an opportunity to invest in some of the sectors that have still not recovered, including Consumer Staples, Healthcare, Utilities, and Financial Services. We sent a communication earlier this week to clients that we would be increasing our allocation to these U.S. based “value” sectors and to stocks that tend to be more stable than the overall market. We still advise owning the top technology companies mentioned above, but recommend a less concentrated allocation of about half the 25% they make up of the S&P 500 Index.
A resurgence of COVID-19 cases has occurred in parts of both the U.S. and Europe. This increases the chances of a second round of national lockdowns which would likely have a significant impact on the financial markets.
While the positivity rates have increased, the hospitalization rates have fallen sharply in the U.S., according to the U.S. Center for Disease Control. As long as the healthcare systems are not overwhelmed, the chances of widespread economic shutdowns remain lower. The outcome of the upcoming U.S. election could also affect the likelihood of further shutdowns.
On Friday morning, it was announced that President Trump and First Lady Melania Trump both tested positive for COVID-19. This news, along with a disappointing jobs report, created more uncertainty for the economy and caused the stock market to drop.
The U.S. Labor Department reported that 661,000 jobs were added to the economy in September, but this fell well short of the 859,000 new jobs that were expected. The unemployment rate fell just under 8%, but it appears that the pace of the economic recovery is slowing. This could put more pressure on Congress to pass another stimulus package who, so far, have failed to find middle ground on a bill.
Many investors are focused on the upcoming election and the impact that it could have on the financial markets. The market tends to underperform during the months leading up to federal government elections, but tends to outperform three, six, and 12 months after elections regardless of the majority party, according to Lord Abbett and Bloomberg. The market has done better both before and after the elections when the government is divided between the Democrat and Republican parties.
It is also interesting to note that the S&P 500 performance in the three months before a Presidential election has predicted whether the incumbent wins or loses 87% of the time, according to the Schwab Center for Financial Research. If the stock market performance in the three months is positive, the incumbent usually wins. If the stock market performance is negative, the challenger usually wins. Over the past two months, the stock market has been up about 3%. We will need to see how the stock market performs in October, and the election results to find out if the market’s predictive power continues.
As it has been widely reported, we will likely not know the results on election day due to the counting of more mail-in ballots. This counting could last for weeks, and the longer there is uncertainty about the outcome, the greater the risk of higher market volatility. We believe that our portfolios are well-positioned for greater market volatility and we will continue to make adjustments as necessary.
We will have more content on the election and its potential impact on the markets including a live webinar, "The Election and Beyond: Is Your Portfolio Prepared?" on October 13, featuring Dr. Apollo Lupescu, vice president of Dimensional Fund Advisors. Click here
to learn more and register for the event. We hope you can join us!