An Oxford Harriman & Company Commentary

Third Quarter Starts with Positive July & August Returns

The U.S. stock market rally remained intact to start 3Q20 as July and August both produced positive returns. Momentum remained positive for stocks as central bank stimulus supported the economy and continued to support liquidity. The technology sector led the market higher again during the third quarter, and the S&P 500 and Nasdaq both reached all-time highs in late August.

From a sector perspective, Financials underperformed the broad market due to low interest rates and loan losses. Real estate also underperformed due to tenant rent deferrals, uncertainty created by the work-from-home trend, as well as uncertainty about the potential for future bankruptcies. Another lagger was the energy sector, due to falling gas demand and weak energy prices.

Second quarter earnings were better than many expected, and this led to an August stock market rally as companies beat estimates at a high rate. Overly pessimistic Wall Street estimates, monetary and fiscal stimulus support, and aggressive cost cutting measures helped the strong earnings beat rate. However, company management teams cautioned uncertainty remained high for the second half of 2020, with some firms ceasing to provide earnings guidance due to the uncertainty surrounding COVID-19.
U.S. bond markets moved mostly higher during the third quarter, following the equity market’s lead. High-yield bonds and municipal bonds outperformed investment grade corporate bonds and U.S. treasuries.

With interest rates near historic lows, savers continue to be hurt by the Federal Reserve’s stimulus policies. Investors searching for yield face a difficult decision related to the tradeoff between higher credit risk and higher yields. We continue to remain cautious of the high yield sector as we are concerned about spread widening and future default rates.

 

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