Head in the Clouds
We hear a lot of derision when the stock market is used as an economic indicator. The skepticism is understandable, and a lot of times may be warranted. The stock market does not reflect how the average American is doing economically. What equity markets do, as far as being an indicator, is show how investors feel about the future in as close to real time as we can get. If investors are feeling optimistic about the economy, it is reflected in how they trade. If there is an expectation of growth, then a little more money can be risked and money floods into equity markets. Just because investors expect economic growth does not mean they are going to get it. This is where we sometimes see a disconnect. Just because you expect there will not be any traffic does not mean there will not be traffic. This seems to be especially true when you are in a hurry to reach a destination.

Third Quarter Performance
With that preamble, we jump into our discussion regarding this past quarter’s strong equity performance. The S&P 500 Index ended the third quarter up 8.5%. This third quarter performance follows a strong second quarter return of 20.0% after the first quarter’s symmetrical decline of 20.0%. The index broke its previous high of 3386.15, set on Feb. 19, with a close of 3389.78 on Aug. 18. Amazingly, the S&P 500 Index got back all it lost in the pandemic-induced swoon within six months.

A contributing factor to the positive returns seen in the quarter was the reopening of cities and states after COVID-19 lockdowns. The Federal Reserve’s projections that interest rates will stay low also positively impacted the markets. Every sector in the index but Energy was up in the quarter. Information Technology added the most to performance. Four of the ten largest contributors to performance for the index were technology companies.

The next best sector contributing to performance was Consumer Discretionary. The performance of the sector shows the increasing strength of the consumer. A strong housing market along with significant household appliance purchases contributed to the sector’s strong performance. Sector performance declined in the last month of the quarter as the effects of the CARES Act stimulus wore off.

The expectation for a significant increase in the demand for energy was not realized. This lack of demand led to the Energy sector being the single biggest detractor from sector performance. The sector was down 19.7% in the quarter.

Go Forward Themes
A major theme that adds to an expectation of continued growth in equity markets is the expansionary monetary environment we are in with regard to interest rates. In addition, we expect to see improvement in the global COVID-19 outlook. This improvement may lead to companies’ confidence in the economy increasing, leading to a higher appetite for cheap debt that could go to capital spending, buybacks or dividends.

The boom in housing could continue as the employment picture improves. Home sales are at levels we haven’t seen since before the Great Recession. The concern that millennials have not been purchasing homes may be abating. The combination of low interest rates, being locked down in tiny apartments and increased savings may have contributed to the increased demand for homes among millennials.

The demand for oil is expected to pick up as economic activity improves. U.S. petroleum consumption dropped to levels last seen in the 1980s. Consumption is expected to increase from the current low levels, eventually reaching 2019 levels in 2022, according to the U.S. Energy Information Administration.

There may be a little more volatility in the markets as we make our way through the election cycle. Fortunately, our process looks past the short-term. We continue to be positive in our long-term outlook for equity markets.

Source: BTC Capital Management, Bloomberg LP, Ibbotson Associates, FactSet.
The information provided has been obtained from sources deemed reliable, but BTC Capital Management and its affiliates cannot guarantee accuracy. Past performance is not a guarantee of future returns. Performance over periods exceeding 12 months has been annualized.

The information within this document is for information purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security. Statements in this report are based on the views of BTC Capital Management and on information available at the time this report was prepared. Rates are subject to change based on market and/or other conditions without notice. This commentary contains no investment recommendations and you should not interpret the statement in this report as investment, tax, legal, and/or financial planning advice. All investments involve risk, including the possible loss of principal. Investments are not FDIC insured and may lose value.