September, as expected, was a difficult month, with markets in the U.S. and abroad down pretty much across the board. Despite this correction, which came after two very strong months, markets were left with strong gains for the quarter, both here and abroad. Overall, the quarter was good for investors despite the disappointing September, and the reasons why come from the same place—the pandemic.
The course of the pandemic. The third quarter started with the pandemic beginning a second wave. The daily spread rate and the daily case rate both increased, as the virus spread around the country. The testing situation also deteriorated, with rates for positive tests increasing. During the quarter, though, the spread rate and the number of new cases steadily decreased, as control measures took effect again.
Economic recovery pushed forward. The decline in medical risks during the quarter helped push the economic recovery forward as well. States and businesses started to open again, and job growth came back in a big way. On top of that, federal stimulus payments put money in the pockets of those most affected by layoffs. This relief helped consumer confidence start to recover, and it brought business confidence back to pre-pandemic levels. The economy as a whole bounced during the third quarter, especially during July and August, but the markets came back.
A rise in medical and economic risks. And then came September. Last month, the infection rates started to creep up again, on the reopening of schools and universities, slowing and starting to reverse the medical improvements seen in the prior two months. Job growth slowed substantially, leaving roughly half of those who lost their jobs facing a much slower recovery, at the same time as the federal stimulus payments stopped. With the rise in both medical and economic risks, markets dropped in the first half of the month, only to partially recover toward the end. While most of the third quarter was positive, the growth trends showed signs of slowing, and even reversing, during the past month.
Which brings us to the present. What can we foresee about the fourth quarter?
A rocky ride in October? October could be difficult. While we enter the month with positive momentum, the same risks that hit markets in September are still with us. Medical risks continue to rise, as outbreaks in many states continue to worsen and case growth continues to tick higher. The economic risks are also still very much in play, as job growth continues to slow and federal stimulus remains off the table. We could well see a market reaction to these risks like the one we saw in September. We also face risks from the pending election in November. Beyond the current medical and economic risks, political disruption is very possible. In fact, the markets are betting on a turbulent month that could well extend through the rest of the year. Looking at the fourth quarter as a whole, there are a lot of reasons to expect volatility. And, of course, there are risks outside the U.S., such as trade, China, and Europe. October could be a rocky ride.
Rising risks. While there are no signs the markets will turn immediately, the risks are rising and will likely take effect at some point. Looking back at the third quarter, we should be grateful for all the tailwinds. But looking forward to the end of the year, we need to be aware they won’t last forever and that the calendar is looking increasingly unfavorable.
Volatility ahead. That said, periods of market volatility are normal. In fact, they are healthy, as they allow adjustment to changing conditions. The risks we are now facing—medical, economic, and political—have waxed and waned over the year, so a difficult quarter will be nothing new. In fact, after the election, there is a good chance next year will look much better. We will have to wait and see, but for the moment, be prepared for volatility—but remember that it will pass.