Market Perspective - American International Group

Market Perspective

A MONTHLY MARKET COMMENTARY FOR TODAY'S INVESTORS

THIRD QUARTER 2020

Economic & Market Overview

Wild but positive quarter Equities continued to climb higher in the third quarter, with broad U.S. indices soaring to new highs before paring back some gains. The S&P 500 Index's streak of five monthly advances came to an end in September, historically a weak month for equities. Previously red-hot large cap technology stocks corrected as uncertainty over U.S. elections and fiscal stimulus negotiations weighed on markets. Still, U.S., Foreign Developed, and Emerging Markets equity indices saw solid gains for the quarter, with economic data pointing to an ongoing recovery. Consensus estimates show that U.S. economic growth is poised for a record rebound in the third quarter after falling for two consecutive quarters. Refer to Chart 1 for trailing returns across equity markets.

What worked in Q3? U.S. sector leadership was mixed during the quarter, with the previous dominance of large cap growth stocks temporarily disrupted by the outperformance of smaller capitalization and more cyclical companies. Consumer discretionary, materials, and industrials led other sectors with double-digit returns for the quarter, while the energy, real estate, and financials sectors trailed. Refer to Chart 2 for best and worst performing equity sectors for the quarter.

Interest rates remained range-bound The yield on the benchmark 10-year Treasury note ended

DID YOU KNOW?

U.S. Interest in Coronavirus has Faded

The U.S. public has lost interest in COVID-19 despite continued high levels of infections. The coronavirus dominated conversations in the first quarter but its popularity as a topic has faded. Google searches about the weather are much higher than the number for COVID-19, showing that the U.S. public has moved on.

September at 0.69%, rising a mere 3 basis points for the quarter. The Federal Reserve pledged to keep interest rates low for years to come, adopting a new "average inflation targeting" strategy to allow higher inflation and welcome strong labor markets. Market expectations for inflation rose during the month, helping the performance of Treasury Inflation-Protected Securities (TIPS). Performance for corporate credit bonds--both investment-grade and high-yield--also stood out as spreads tightened, mirroring the strength seen across equity markets. Refer to Chart 1 for trailing returns across fixed income sectors.

Help wanted The pace of the U.S. economy's recovery has increased over the summer. Third quarter GDP may have risen at a 25% annualized rate according to estimates gathered by Bloomberg. The unemployment rate fell considerably from a peak of 14.7% in April to 8.1% in mid-September. But the labor market remains fragile. The unemployment figure doesn't include 14 million additional people receiving pandemic program benefits. The Payroll Support Program, which supported tens of thousands of jobs in the airline industry, has expired and led to layoff notices. Other large companies, like Disney, have announced layoffs or are eliminating positions that were previously furloughed. Unfortunately, additional government support may still be needed to meet the 5% expected GDP growth in the fourth quarter.

(continued on next page)

Top searched U.S. topics in 2020

100

80

60

40

20

0 Dec-19 Jan-20 Feb-20 Mar-20 Apr-20 May-20 Jun-20 Jul-20 Aug-20

Source: Google Trends

Coronavirus

Weather

Market Perspective

A MONTHLY MARKET COMMENTARY FOR TODAY'S INVESTORS

3Q 2020

Chart 1: Index Returns ? Third Quarter 2020

1414%

13.2%

1212%

1010%

8.9%

9.6%

88%

66%

4.9%

44%

5.6%

4.8%

3.0%

4.6%

22%

0.6%

00%

S&P 500

Russell 2000 Russell 1000 Russell 1000

Growth

Value

MSCI EAFE

MSCI EM

Bloomberg Bloomberg Bloomberg

Barclays U.S. Barclays U.S. Barclays U.S.

Aggregate Bond

TIPS HY 2% Issuer Cap

Source: SAAMCo and Morningstar, Inc. Indices are unmanaged and cannot be invested in directly. Past performance is no guarantee of future results.

Earnings need to grow Stock markets have rebounded dramatically from their March lows. So far, the rally has been driven by rising earnings multiples, rather than increasing earnings estimates. This is typically the case after a recession. The S&P 500 Index's current 12-month forward price-to-earnings ratio of 21.5 is at a level seen only during the tech bubble. The above-average multiple may be supported now by ultra low interest rates, but earnings estimate increases may be needed to keep markets moving up. While the S&P 500 Index price has retraced to levels above 2019, earnings estimates for 2021 are just 3% above 2019 earnings and have been pretty flat for several months.

Chart 2: Best & Worst Performing S&P 500 Sectors

Third Quarter 2020

220%0 15 15.1%

15%

110%0 55% 00% -5-%5 -1-10%0 -1-15%5 -2-20%0 -2-25%5

13.3%

12.5%

Best Worst

1.9%

4.5%

-19.7%

Consumer Materials Industrials Energy Real Estate Financials Discretionary

Source: SAAMCo and Morningstar, Inc. Past performance is no guarantee of future results.

Market Perspective is published monthly by SAAMCo. Although the information herein has been obtained from resources believed to be reliable, SAAMCo does not guarantee its accuracy, completeness, or fairness. Opinions and estimates may be changed or withdrawn without notice. The information contained in this report should under no circumstances be considered investment advice or recommendations for the buying or selling of any security or commodity. SAAMCo is a member of American International Group, Inc. (AIG).

Market Perspective

A MONTHLY MARKET COMMENTARY FOR TODAY'S INVESTORS

3Q 2020

Past performance does not guarantee future results. Diversification does not guarantee investment returns and does not eliminate the risk of loss.

The price of equity securities may rise or fall because of changes in the broad market or changes in a company's financial condition, sometimes rapidly or unpredictably.

Bonds may cause the value of your investment to go up or down in response to changes in interest rates or defaults (or even the potential for future defaults) by bond issuers.

Futures contract is a legal agreement to buy or sell a particular commodity or asset at a predetermined price at a specified time in the future. Futures contracts are standardized for quality and quantity to facilitate trading on a futures exchange. The buyer of a futures contract is taking on the obligation to buy the underlying asset when the futures contract expires. The seller of the futures contract is taking on the obligation to provide the underlying asset at the expiration date.

Housing performance return is the year-over-year gain in the median existing-home price for all housing types, reported by the National Association of Realtors? every month.

Value Investing - The investor's judgment that a particular security is undervalued in relation to the company's fundamental economic value may prove incorrect.

Growth Investing- These stocks normally carry higher price/ earnings ratio than many other stocks. If earnings expectations are not met, market price of growth stocks will often decline more than others stocks.

International Investing involves a greater degree of risk and increased volatility. In emerging countries, these risks may be more significant.

S&P 500? Index tracks the common stock performance of 500 largecapitalization companies publicly traded in the United States.

Russell 2000? Index measures the performance of the 2,000 smallest companies in the Russell 3000? Index and is widely recognized as representative of small-cap stocks.

Russell 1000? Growth Index measures the performance of those Russell 1000? Index companies with higher price-to-book ratios and higher forecasted growth values.

Russell 1000? Value Index measures the performance of those Russell 1000? Index companies with lower price-to-book ratios and lower forecasted growth values.

MSCI? EAFE? Index is a free float-adjusted market capitalization index designed to measure the equity market performance of developed markets. It includes stocks from 21 developed markets, but excludes U.S. and Canada.

MSCI? Emerging Markets Index is a free float-adjusted market capitalization index that is designed to measure equity market performance of emerging markets.

Bloomberg Barclays 1-3 Month U.S. Treasury Bill is designed to measure the performance of public obligations of the U.S. Treasury that have a remaining maturity of greater than or equal to 1 month and less than 3 months. The Index includes all publicly issued zero coupon U.S. Treasury Bills that have a remaining maturity of less than 3 months and at least 1 month, are rated investment-grade, and have $300 million or more of outstanding face value.

Bloomberg Barclays U.S. Aggregate Bond Index is an unmanaged index of domestic investment-grade bonds, including corporate, government and mortgage-backed securities.

Bloomberg Barclays U.S. High-Yield 2% Issuer Capped Bond Index is a component of the Bloomberg Barclays U.S. Corporate High-Yield Bond Index, which covers fixed-rate, non-investment grade corporate debt of issuers in non-emerging market countries. It is not market capitalization-weighted--each issuer is capped at 2% of the index.

Bloomberg Barclays U.S. Treasury Inflation Protected Securities (TIPS) Index consists of Treasury inflation-protected securities issued by the U.S. Treasury with a remaining maturity of one year or more.

Indices are not managed and an investor cannot invest directly into an index.

This report is to be used for informational purposes only. In no event should it be construed as a solicitation or offer to purchase or sell a security.

The information presented herein is taken from sources believed to be reliable, but is not guaranteed by AIG as to accuracy or completeness.

M4822M20.10 (10/20)

 ................
................

In order to avoid copyright disputes, this page is only a partial summary.

Google Online Preview   Download