Last Quarter Came Good

Last Quarter Came Good

over 3 years ago3 mins

Mentioned in story

We’ve waved goodbye to the third quarter of 2020, and there’s just one more to go to close out the year. And by most investor assessments, despite still-turbulent times, things have gone pretty swimmingly.

🕰 Recap

  • US stocks turned in their best quarterly performance since 1998 in the second quarter
  • That’s despite the US and eurozone’s steepest-ever economic shrinkages over the period
  • In the third quarter, investors ummed and ahhed about whether to switch from high-growth stocks to cheaper-looking ones
  • And overall, US stocks closed out September having risen 8% over the prior three months

✍️ Connecting The Dots

The global economic recovery kicked off in earnest last quarter, but US stocks were way ahead: they’d already risen 20% in the second quarter. Investors weren’t necessarily expecting a repeat of that, mind you, and it’s just as well: US stocks were “only” up 8% overall last quarter.

That was mostly thanks to a 14% rise in consumer discretionary stocks (led by the likes of Nike and Amazon), as well as a boost in seemingly foolproof tech and communications stocks – which rose 13% and 12% respectively. Industrials firms weighed in too with an average 12% gain, as investors increasingly opted for “cyclical” companies – whose earnings growth is tied to the economy’s – and materials stocks. The latter in particular appeared to benefit from an uptick in house-buying, which has been spurred by the availability of low interest rate mortgages.

So-called “defensive” sectors – whose earnings are typically stable and whose shares, in turn, don’t usually experience massive swings up or down – held their own. Consumer staples rose by 10%, utilities were up 7%, and healthcare and utilities stocks were up 5% apiece. Bringing up the rear were energy companies, which were down almost 20% on average. You won’t be surprised to hear they’ve continued to suffer from the pandemic’s effects, including plummeting oil and gas demand from once-major customers like airlines.

🥡 Takeaways

There’s an enduring concept in the investing world called “mean reversion”. It basically suggests that, over time, prices that have risen or fallen significantly will bounce back to some sort of average level, undoing its under- or outperformance. And that’s something some investors are relying on: they’re hoping that, say, oil’s slump might reverse course soon and bag those investors who “bought the dip” a profit. Other investors think a coronavirus vaccine could have the same effect. If it does, a vaccine-induced pickup in economic growth would boost cyclical stocks the most, at the expense of this year’s high-performing growth stocks.

November’s US election is likely to have a bigger effect on stock markets than the goings-on in any single industry, but its impact on company earnings might actually be more positive than people think. According to investment bank Goldman Sachs’ analysis, the outcome that investors think is most likely – a Democratic Party win – would boost profits 4%. There’ll be tax hikes, sure, but they’ll be more than offset by economy-boosting government spending.

🎯 Also On Our Radar

Spare a thought for Japanese investors who last week saw a technical glitch shut down the entire Tokyo Stock Exchange on Thursday. It was the worst outage in 20 years, and the country’s financial regulator has promised to get to the bottom of what exactly happened. The exchange was back open on Friday, but with a holiday period now kicking off across parts of Asia, its resilience probably won’t be fully tested for a while.

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