Third quarter 2020 capital markets outlook

December 9, 2020


  • September diverged from the prior five months as equity markets across the globe produced moderately negative returns.  Additionally, safe haven assets (e.g., US Treasury bonds) were roughly flat.
  • Despite negative returns in September, risk-oriented markets have rebounded significantly since the March lows and Q3 was another strong period in aggregate.  However, there has been a high degree of divergence among equity regions/styles/capitalizations, and this is exemplified at the extremes with US large cap growth stocks outperforming US small cap value stocks by over 45% thus far in 2020.
  • As expected (considering recent Federal Reserve announcements), the entire US Treasury yield curve was effectively unchanged from the end of August to the end of September.
  • Conversely, real yields in the US ticked up during September, with the most significant movements occurring at the short end of the curve.  The entire real yield curve does, however, remain in negative territory.
  • Recent economic data has shown a divergence among regions and metrics.  Certain areas (e.g., US housing, China GDP, etc.) have been positive whereas other segments (e.g., US payrolls) are still indicative of broad challenges.  Many global authorities appear to be in a period of observation as they attempt to gauge how the economy does, or does not, recover in the short term.
  • Local/regional US economies are in various stages of reopening, and the timeline for returning to normal levels of economic activity remains uncertain.  Relatedly, the aggregate impacts to global GDP due to the COVID-19 pandemic are still unknown.  Returning to pre-COVID levels of economic activity is not expected to occur until 2021 at the earliest.
  • Implied equity market volatility remained relatively stable throughout September at around 25-30.  Conversely, our Systemic Risk measure increased during the month, while implied fixed income volatility declined during September.
  • While valuations for several risk-based asset classes appear neutral-to-attractive at first glance, it is important to note that the full impact on corporate earnings and solvencies remains unknown.  The path that the global economy will take moving forward is uncertain.
  • The Market Sentiment Indicator remained green (i.e., positive) at month-end.