In spite of heightened volatility in stocks as the quarter drew to a close, the markets generally moved higher over the period. For the quarter, US large company stocks rose 8.9%, smaller company US stocks were up 4.9%, foreign stocks were higher by 4.8%, and US bonds, broadly measured, were up 0.6%. While stock indexes were higher for the quarter, the markets were mixed, with small company and foreign stocks having lost value, while large company stocks have moved higher.
The overall picture for the quarter is something of an illusion, however, since most stock market measures (indexes) over-represent larger companies in their composition. In reality, the group of stock gainers for the year has been relatively narrow. Higher returns for a limited set of stocks in large technology, social media, alternative energy, electric auto, and online retail have done much to hold up market averages.
In March, the stock market dropped by about 35% in an epic plunge as the coronavirus became a global pandemic threatening global health and economies. Since then, following a market bottom on March 23, we have had two quarters of rising markets. By early September, the S&P 500, a widely followed measure of large US company stocks, had fully recovered from the coronavirus sell-off and set a new record, though it has since pulled back.
While the stock market indexes have had a good quarter, many significant risks persist— including the ongoing impact of Covid response measures that keep consumers at home and away from restaurants and businesses, record unemployment, and tumbling business revenues in many economic sectors. Analysts point to a handful of key elements that have fueled investor confidence and supported the stock market thus far. The primary factor has been the economic stimulus measures taken by the Fed and Congress early in the pandemic. The Fed moved aggressively to cut interest rates to near-zero and designed programs to lend billions of dollars to market participants in support of basic functioning. The US government delivered more than 150 million stimulus payments to Americans and backed a half trillion dollars in loans to small businesses. Investors have taken all this to mean that the federal government will spend whatever it takes to avoid economic collapse in the US. This belief, held by many investors, has helped to maintain confidence not only in the markets, but in the economy as well.
A second element driving the stock market is a broadly held expectation that the US economy will eventually recover once the pandemic recedes. While some believe that the end is nigh, many more seem to believe that better economic days will return, and maybe sooner than we think. Manufacturing, hiring, and consumer spending have all accelerated for four straight months through August, lending credibility to that notion.
There is, of course, a highly charged US presidential election on the horizon. There are many considerations for investors, including election security, foreign meddling, mail-in ballots, and others that are beyond the scope of this article. A Democratic administration would likely seek a reversal of the 2017 deficit-exploding tax cuts enacted by Congress. This scenario would be generally consistent with the well-known cycle of Republicans taking office and cutting taxes, followed by Democrats taking over and increasing them. Interestingly, the historic average market annual return of 3.5% under Republican administrations has been dwarfed by the 6.7% average under Democratic administrations. History would suggest that the markets have little to fear from a Biden administration.
