The third quarter of 2020 saw continued strong global equity markets, but recent weeks have seen uncertainty return. The failure of the government to pass additional stimulus was viewed as a disappointment, especially as earnings data highlights the seriousness of the economic downturn. S&P 500 Index earnings fell 16% in the twelve months ending June 30. Internationally, the situation was worse with earnings declines of 27% in emerging markets and an amazing 53% in developed markets. This comes as equity markets returned +7.5% in the U.S., -3.4% in emerging markets, and -5.1% in developed markets during that same twelve-month period.
This disconnect between stock price performance and earnings pushed valuation levels higher. Investors are clearly anticipating a major economic and earnings recovery, but without additional government stimulus, the time horizon will likely be longer. Recent news of the return of economic lockdowns in Europe will likely lengthen their recovery process even further. We expect to see market volatility lessen in the weeks following the election, especially if the results are uncontested and stimulus talks resume.
Alan Bergin is the Senior Vice President of Fund Evaluation Group in Dallas, TX, the Foundation’s consulting firm.