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3rd Quarter 2020 Market Update

15 October 2020


Geremy van Arkel, CFA | Director of Strategies

Is it really the end of the third quarter? Well, that was quick! Maybe time flies because the path we have taken this year has been anything but boring.

No one could have predicted the series of events that have occurred (so far) in 2020. No one! We have gone from the best of economies to the worst, and from market panic to euphoria. The COVID-19 crisis and economic shut down led to a speedy market decline, record unemployment, and record GDP volatility. It caused cities and businesses to shut down and then to abruptly open back up – and all this was followed by the fastest market recovery in history. As for the asset price “recovery,” the explosion might be a better characterization. Investors are downright euphoric as if the future that is being discounted implies that today is one of the best times in history to be an investor. All this has occurred in what feels like a nanosecond – or what my son might call “Nintendo-time.” However, despite a tsunami of news, asset prices are again higher. This is a good thing for investors and the economy. So, another great quarter? We will take it.

Yet conundrums remain. Asset prices for stocks, bonds, and real estate are at or near all-time highs, while earnings and the economy have been negatively impacted this year. Employment and economic output are – while better than what would have been expected – still reflecting a significant slowdown. Earnings, too, in general, are beating expectations, yet the overall earnings number is expected to be almost 30% below earlier predictions. If S&P 500® earnings come in at current expectations for 2021, this will reflect flat earnings growth for four years. This same phenomenon of ever-rising asset prices in the face of a flat – at best outcome – economy is occurring across most other global stock markets, although to a lesser degree than here in the U.S. Yet it is the capital markets that price the future, and thus investors are expecting a continued and robust recovery.

Growth in Stock Prices – Not in Earnings

While U.S. stock returns over the past six months reflect an extremely optimistic view of what is turning out to be a longer-term recovery, returns of groups of securities within stock markets have been disparate. Market breadth has been extremely narrow, similar only to the extreme focus on tech stocks that occurred in the late ‘90s. Ponder this statistic. Of the 9,000 listed securities in the global stock basket, only 30 have provided 70% of global stock returns for the last five years!

Further to this conundrum, just five stocks – FAAAM (Facebook, Apple, Amazon, Alphabet, and Microsoft) – make up over 25% of the S&P 500. This hyper-focused market, which has basically placed all of its chips on tech stocks, has left wide swaths of securities in its wake. Growth stocks have outperformed value stocks this year by more than 35%, large cap stocks have outperformed small cap stocks by about 20%, and domestic stocks have outperformed international stocks by about 10%. In addition, small cap stocks, value stocks, international stocks, commodities, and REITs are all left with negative returns so far this year. The top-performing major asset this year? Long-term treasuries, again outperforming all other asset classes on the grid. To win this year, one had to be invested in growth and technology stocks, to own those stinking treasury bonds, or to be involved in risk management – to win by losing less. Thankfully, we at Frontier had a bit of all of those.

The final conundrum is a longer-term and systemic problem: a market on life support. In these unprecedented times, we all understand the need for a central bank and government stimulus. This time around, the fire hydrant of stimulus provided, coordinated globally, is upwards of three times the amount of stimulus unleashed in 2008 – even after adjusting for GDP. But this stimulus is not reserved for only times of trauma. It has been a constant base of support globally for asset prices and the economy since 2008.

Money, money everywhere, not a drop to drink.

It now appears that the umpteen trillion dollars provided this year may not be enough, as the market claims to hang in the balance of further stimulus. Is it ever enough? How does it ever end?

In a weird twist of fate, it isn’t low interest rates, quantitative easing, and outright government spending that are the lifeline for the economy anymore. It is the high asset prices themselves that are now providing life support for the economy. The higher the stock market and real estate prices go, the better off we are, and by multiples of any other stimulus that can be provided.

Consider the following two scenarios. If I were to offer you either a 20% bonus or to somehow make the stock and real estate markets rise 20%, which would you take? There are no right answers here, but the truth is that most people would take a 20% asset price rise over a bonus. Alternatively, what would be the impact on the economy if the stock market and real estate market dropped 20% and stayed there? There is almost no way for the economy to perform in the face of falling asset prices.

This question frames the conundrum: asset prices are leading the economy, not the other way around. This has caused asset prices to maybe be more important to consumers than their wages. The fundamental belief that jobs and wages drive the economy has changed. Asset prices and how central banks react to them is now the defining variable. This probably explains how the economy can seem so poor and unemployment so dire, yet asset prices fight for new highs.

If asset prices are now the economy, they simply cannot fall, for the downside is just too great. Yet trees don’t grow to the sky either. After a decade of rising prices for stocks, bonds, and real estate, it doesn’t seem that they can rise much more. This leads to the stalemate: optimism or pessimism, or the boring third option – maybe we just muddle along. The good news is that you don’t have to know the answer to this conundrum to get ahead.

This is a confounding time to be an investor, by all accounts. Positioning for growth, risk management, and added value has just become more complicated. However, the more popular the narrow view of the market becomes, and the more disparate returns are, the greater the opportunity to add value. At turning points in leadership, it often pays to be a contrarian. After all, rule number one is the return of capital, but rule number two is to buy low and sell high. Go where the others aren’t. For the inventive investor, there are plenty of stones left unturned in this narrow leadership market environment.[i]

Capital Markets Overview

Clifford Stanton, CFA | Director of Investments


  • According to FactSet, third quarter S&P 500 earnings are expected to come in almost 21% below the level recorded a year ago, but at least the estimates have been moving in the right direction. Back in June, 3Q earnings were forecast to fall by 25%. Digging into the sector data, only Industrials and Utilities have back-peddled, with estimates deteriorating, albeit marginally so.
  • While the exuberance witnessed in August faded in September, the third quarter was still one to celebrate. The S&P 500 gained almost 9%, with growth stocks outpacing value by about 700 basis points. Small caps gained almost 5% but are still in the red by approximately 9% year-to-date. Emerging markets turned in the best quarter, advancing by about 9.6%, and doubling the performance of the MSCI EAFE index, which returned close to 4.8% The performance of emerging markets is increasingly tied to the Technology and Consumer Discretionary sectors, which have grown from about 26% of the index during the Global Financial Crisis (GFC), to about 51% today. Conversely, Energy and Materials have seen their importance diminish; their combined index weighting fell from 37% to about 12% over the same time period.
  • Bonds produced a modest return for the quarter, with the Barclays U.S. Aggregate advancing by nearly 0.6%. However, there was meaningful dispersion below the surface. Duration risk didn’t pay off, in part due to the Fed’s new approach to inflation targeting, and long-term Treasuries finished the quarter up just about 13 bps. But credit did well; option-adjusted spreads for high yield bonds narrowed by about 100 bps, and the Barclays U.S. Corporate High Yield Index gained approximately 3.0%.
  • With continuing signs of an economic recovery, commodities joined the rally in risk assets, with particularly strong returns coming from silver and natural gas, and the Bloomberg Commodities Index advanced by close to 9.1%.

Strategy Overview

  • Relative to their long-term strategic allocations, our strategies were generally underweight equities and high-quality bonds at the beginning of the quarter, while being overweight long-term Treasuries and TIPs, and in the more conservative strategies (i.e., Capital Preservation, Conservative and Multi-Asset Income), cash.
  • Given this positioning and the strong performance of equities, our composite returns came in below benchmarks for the quarter, although we did close the gap during the month of September. Our estimates of the value add from actively managed funds indicate that fund selection was slightly additive across all strategies during 3Q except for Absolute Return Plus.
  • During the quarter, we raised our allocations to small caps, international small caps, and emerging markets (depending on the strategy), as our long term expected returns for equities have been increasing, excepting U.S. large caps. Within the fixed income area, the most notable change was an increase in TIPs.
  • As we mentioned last month, our risk models continue to indicate that there is a heightened chance of further market turbulence, and as such, our below benchmark risk exposures will likely continue, given our focus on downside risk management. To be clear, our downside focus does not mean that we are perennially conservative, rather that we tightly define the risk for each strategy and manage to those targets.

Past performance is no guarantee of future returns. Performance discussed represents total returns that include income, realized and unrealized gains and losses, but gross of advisory fees. Nothing presented herein is or is intended to constitute investment advice or recommendations to buy or sell any types of securities and no investment decision should be made based solely on information provided herein. There is a risk of loss from an investment in securities, including the risk of loss of principal. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment will be profitable or suitable for an s investor’s financial situation or risk tolerance. Diversification and asset allocation do not ensure a profit or protect against a loss. All performance results should be considered in light of the market and economic conditions that prevailed at the time those results were generated. Before investing, consider investment objectives, risks, fees and expenses.
Frontier does not directly use economic data as a part of its investment process.
Information provided herein reflects Frontier’s views as of the date of this newsletter and can change at any time without notice. Frontier obtained some of the information provided herein from third party sources believed to be reliable, but it is not guaranteed, and Frontier does not warrant or guarantee the accuracy or completeness of such information. The use of such sources does not constitute an endorsement. Frontier’s use of external articles should in no way be considered a validation. The views and opinions of these authors are theirs alone. Reader accesses the links or websites at their own risk. Frontier is not responsible for any adverse outcomes from references provided and cannot guarantee their safety. Frontier does not have a position on the contents of these articles. Frontier does not have an affiliation with any author, company or security noted within. Frontier reserves the right to remove these links at any time without notice.
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Any forward-looking statements or forecasts are based on assumptions and actual results are expected to vary from any such statements or forecasts. No reliance should be placed on any such statements or forecasts when making any investment decision. The estimates, including expected returns and downside risk, throughout are calculated monthly by Frontier and will change from month to month depending upon factors, including market movements, over which Frontier has no control.  They are only one factor among many considered in Frontier’s investment process and are provided solely to offer insight into Frontier’s current views on long-term future asset class returns.  They are not intended as guarantees of future returns and should not be relied upon in making investment decisions. Additional information on performance and mutual fund added value is available upon request.
Hypothetical expected returns have certain limitations, are shown for illustrative purposes only and it should not be assumed that actual results will match the hypothetical expected returns shown.  Unlike actual performance, hypothetical expected returns do not represent actual trading and since trades have not been executed, the results shown may have under or overcompensated for the impact, if any, of certain unforeseen market factors.  Hypothetical expected returns, whether back-tested or forecasted, have many inherent limitations and no representation is being made that any account will or is likely to achieve the results shown. In fact, there are frequently material differences between hypothetical expected results and actual results achieved.  One of the limitations of hypothetical expected results in that they do not take into account that material market factors may have impacted the adviser’s decision-making process if the firm were actually trading clients’ accounts.  Also, when calculating the hypothetical expected returns, the adviser has the ability to change certain assumptions and criteria in order to reflect better returns.  There are numerous other factors related to the markets in general or to the implementation of any specific investment strategy that cannot be fully accounted for in the preparation of hypothetical expected results, all of which can adversely affect actual trading and performance.  Importantly, it should not be assumed that investors who actually invest in this strategy will have positive returns or returns that equal either the hypothetical expected results reflected or any corresponding benchmark presented.  In addition, performance can, and does, vary between individuals.
In reviewing the performance information presented here, we recommend that you consider both the returns generated and the level of risk that was assumed in generating those results. We believe that performance information cannot be properly assessed without understanding the amount of risk that was taken in delivering that performance.
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It is generally not possible to invest directly in an index. Exposure to an asset class or trading strategy or other category represented by an index is only available through third party investable instruments (if any) based on that index.
S&P 500®
Represents US large company stocks. It is a market-value-weighted index of 500 stocks that are traded on the NYSE, AMEX, and NASDAQ
Measures international equity performance. It is comprised of the MSCI country indexes capturing large and mid-cap equities across developed markets in Europe, Australasia and the Far East, excluding the U.S. and Canada.
MSCI Emerging Markets
Measures large and mid-cap equities across 23 Emerging Markets (EM) countries which include Brazil, Chile, China, Colombia, Czech Republic, Egypt, Greece, Hungary, India, Indonesia, Korea, Malaysia, Mexico, Peru, Philippines, Poland, Russia, Qatar, South Africa, Taiwan, Thailand, Turkey and United Arab Emirates.
Bloomberg Commodity Index
This is a broadly diversified index that allows investors to track commodity futures through a single, simple measure. The DJ-UBSCISM is composed of futures contracts on physical commodities.
Barclays US Aggregate Bond
Measures the performance of the U.S. investment grade bonds market. The securities must have at least one year remaining to maturity, must be denominated in U.S. dollars and must be fixed rate, nonconvertible and taxable.
Barclays Capital Long U.S. Treasury
Includes all publicly issued, U.S. Treasury securities that have a remaining maturity of 10 or more years, are rated investment grade, and have $250 million or more of outstanding face value
Barclays U.S. Corporate High Yield Index
Represents domestic non-investment grade corporate bonds. Floating-rate and convertible bonds and preferred stock are not included.
Russell 2000
Measures the performance of the small-cap segment of the U.S. equity universe
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[i] Bloomberg (2020), Money Managers Are Punished by a Runaway S&P 500. Retrieved from

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