Monthly Market Report: September 2020

Investments with uncorrelated returns proving to be valuable

Prepared by Brandon Yee, CFA, CAIA, and Thomas Connelly, CFA, CFP®

Developed Markets losing steam

Developed Markets Plateau

In the month of September, international developed stock markets returned-2.82%. Japan and Europe ex UK recorded returns of 0.98% and -2.87%, respectively. The U.K. and Pacific ex Japan lagged the broader market. Year to date returns have bounced back considerably since the March lows.The U.S. market is up 6.83% while international developed markets in the aggregate are down -7.13%.Aggregate economic activity is steadily recovering. However, businesses related to travel, tourism, hospitality, and energy continue to facechallenges.Air travel volumein Europe and the U.S. have only recovered to 50% and 30% of January 2020 levels.

Volatility increasing in emerging market equities

Asian Equity Markets Positive YTD

Broader emerging markets posted a -1.95% return for the month. Korea and Mexico recorded returns of 4.60% and 1.09%, respectively. Russia and Brazil lagged other markets in September. The Chinese equity market is positive for the year, recording a YTD return of 16.45%, which has outperformed most other world markets. Retail sales and foot traffic in China have improved since March and are now positive year over year. The implementation and enforcement of proper COVID-19 safety measures can help increase business activity.

Global Sector

Materials and Utilities Outperform

Materials and utilities recorded returns of -0.43% and -0.29%, respectively, in September. Information technology and energy lagged other sectors. This summer, information technology companies experienced a “melt up” in the prices of their stock as retail investors and big institutional buyers like Softbank became bullish. However, valuations became extended and resulted in September’s tech pullback. Defensive sectors such as consumer staples, materials, and telecommunications are now positive for the year.

Domestic Equity Factors

Large-Cap Value Stocks Outperform

In September, value outperformed growth in the large-cap space but underperformed in the small-cap space. Momentum recorded a gain of -1.75%. Relative valuations between value stocks and growth stocks are at historical highs based on the price to book valuation metric. Growth stocks have held up better this year, but their future earnings may not justify the higher valuations. Momentum and large-cap growth strategies performed well during the past one- and five-year periods.

Foreign Equity Factors

Value Underperforms in Foreign Markets

In the international developed markets, value underperformed growth in the large-cap space and small-cap space. Momentum recorded a gain of -0.56% while small-cap emerging market stocks posted a return of -1.83%. Foreign momentum strategies have performed well year to date and over the past twelve months.

Liquidity Providers

Interest Rates to Remain Low

In September, the three-month Treasury bill index returned 0.01% for the month. Interest rates on Treasury bills and money market funds are close to 0%. The Federal Reserve indicated they will keep interest rates at current levels until inflation picks up, which may take years. Savers may face low rates for a long period of time, which will negatively impact retirees and people close to retirement. The CPI decreased by -0.80% through August.

Deflationary Hedges

Catastrophe Bonds Provide Uncorrelated Return in Volatile Month

The returns of deflationary hedges were mixed for the month. Catastrophe bonds and long-term government bonds returned 1.03% and 0.40%, respectively. Long-term government bonds are up 21.13% year to date. The Bloomberg Barclays U.S. Agg Bond Index returned -0.05% in September. Riskier forms of credit such as high-yield bonds, leveraged loans, and BDCs are still negative for the year.

Inflation Sensitive Investments

Gold Providing Valuable Diversification

Inflation-sensitive investment returns were mostly negative for the month. Gold bullion posted a return of -3.60%. The Alerian MLP dropped by -13.62% in September. Gold bullion is up 24.57% YTD, outperforming most other assets. Gold miners have also outperformed as they provide levered exposure to the gold price. Domestic and foreign REITs are still down approximately -20% for 2020.

World Currencies

U.S. Dollar Depreciating

Over the past three months, the U.S. dollar depreciated against most major currencies. The Euro notably gained 3.82% versus the U.S. dollar. Over the past year, the U.S. dollar has also depreciated against most major currencies except the Mexican Peso and Canadian Dollar. The continuation of large U.S. fiscal stimulus packages may weigh on the U.S. dollar in the medium-term to long-term while the government’s inability to control COVID-19 has also depressed rates.

Brandon Yee, CFA, CAIA – Research Analyst

Brandon conducts investment due diligence for Versant Capital Management, and designs and implements tools and processes to support the firm’s research. His background in biology and finance help him to look at challenges from multiple angles, resulting in unique and well-rounded approaches and solutions.


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