Client Communication - Madison Commentary Report | 3Q 2020


The most notable characteristic of stock market performance since March has been its steady rise against an economy deeply scarred by the Covid-19 pandemic. That trend reversed in the final month of this past quarter as the market suffered its worst September in almost a decade with the S&P 500® Index dropping -3.8%, bringing the quarter return for the Index to a still robust 8.9%. This effectively erased the deep loses of February and March, bringing the year-to-date return to 5.6%. In the end, the quarter followed the previous quarter's trend in terms of the best market performance being centered on the Consumer Discretionary and Technology Sectors with particularly strong contribution coming from mega-cap companies. The influence of a handful of the largest companies has been an important driver of returns: at quarter end the five largest companies in the S&P 500 represent 22.5% of the total index, surpassing the previous peak of 18% at the market peak of the technology bubble in 2000.

One notable reversal for the final month of the quarter was the outperformance of value stocks over growth stocks, reversing a trend which had produced a wide performance dispersion between these two categories. The large-cap Russell 1000® Growth Index dropped -4.8% for the month while the Russell 1000® Value Index was down -2.6%. This disparity was at odds with the powerful recent trend. For the quarter, the Russell 1000 Growth Index was up 13.2% compared with just 5.6% for the 1000 Value Index and the year-to-date gap is even more extreme. The growth-value dispersion has been even more pronounced for smaller stocks, with Russell's Mid Cap Growth Index up 13.9% for the year through September 30, while the Russell Mid Cap Value Index struggled at -12.8%, a huge gap of 26.7%. These index disparities reflect directly on how over the past six months investors have preferred certain sectors, particularly technology-driven companies, many of whose businesses have been boosted, rather than hurt, by the pandemic. The shift in September could be a sign that this trend overshot, producing excess valuations. It could also mark a sense that investors are hopeful the economy is working its way through the pandemic, a sentiment encouraged by the prospect for vaccines. On the political side, the possibility of a change in administration may have also been a driver, since the large growth companies that led the market could be adversely affected by anti-trust and tax policy shifts.

Another reason for the market pause in September was the realization that a second round of fiscal stimulus might be delayed, reduced, or even forgone. That did not affect the main engine behind the sixth-month stock rally, the Federal Reserve's aggressive stimulus which translated into lower loan rates which in turn have sparked housing and car sales.

Looking forward we see an extended period which may be described as riding out the Covid-19 and pre-to-post election storm. This period may very well turn out to be longer than is generally anticipated. It is likely we will need a globally distributed vaccine to move beyond the worldwide pandemic-sparked economic slowdown. Even as we move beyond Covid-19, the economic landscape for many sectors and individual businesses will likely be clouded at best and may take a significant period of time to clear. Many who have been laid off, furloughed or lost jobs face an uncertain future once stimulus is geared down. This may impact consumer spending, financial companies and other businesses tied to an economic recovery. And as if we needed more anxiety, we are looking at a contentious presidential election with unknown post-election complications, with potentially significant changes to the makeup of Congress. This adds to uncertainty as many companies and sectors may face higher taxes and revised regulation.

For these reasons, and for others that may yet develop, we believe retaining a finely honed risk consciousness is the way to approach today's and tomorrow's markets. The turn of sentiment in September towards more reasonably valued companies is one we find heartening and perhaps a harbinger of what we could expect through the end of the year and into 2021.

“Madison” and/or “Madison Investments” is the unifying tradename of Madison Investment Holdings, Inc., Madison Asset Management, LLC (“MAM”), and Madison Investment Advisors, LLC (“MIA”), which also includes the Madison Scottsdale office. Hansberger Growth Investors, L.P. or “HGI” is an affiliate of “Madison Investments.” MAM, MIA and HGI are registered as investment advisers with the U.S. Securities and Exchange Commission. Madison Funds are distributed by MFD Distributor, LLC. MFD Distributor, LLC is registered with the U.S. Securities and Exchange Commission as a broker-dealer, and is a member firm of the Financial Industry Regulatory Authority. The home office for each firm listed above is 550 Science Drive, Madison, WI 53711. Madison’s toll-free number is 800-767-0300.

Any performance data shown represents past performance. Past performance is no guarantee of future results.

Non-deposit investment products are not federally insured, involve investment risk, may lose value and are not obligations of, or guaranteed by, any financial institution. Investment returns and principal value will fluctuate.

This website is for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security.

“Madison” and/or “Madison Investments” is the unifying tradename of Madison Investment Holdings, Inc., Madison Asset Management, LLC (“MAM”), and Madison Investment Advisors, LLC (“MIA”), which also includes the Madison Scottsdale office. Hansberger Growth Investors, L.P. or “HGI” is an affiliate of “Madison Investments.” MAM, MIA and HGI are registered as investment advisers with the U.S. Securities and Exchange Commission. Madison Funds are distributed by MFD Distributor, LLC. MFD Distributor, LLC is registered with the U.S. Securities and Exchange Commission as a broker-dealer, and is a member firm of the Financial Industry Regulatory Authority. The home office for each firm listed above is 550 Science Drive, Madison, WI 53711. Madison’s toll-free number is 800-767-0300.
Any performance data shown represents past performance. Past performance is no guarantee of future results.
Non-deposit investment products are not federally insured, involve investment risk, may lose value and are not obligations of, or guaranteed by, any financial institution. Investment returns and principal value will fluctuate.
This report is for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security.
Although the information in this report has been obtained from sources that the firm believes to be reliable, we do not guarantee its accuracy, and any such information may be incomplete or condensed. All opinions included in this report constitute the firm’s judgment as of the date of this report and are subject to change without notice.
Indices are unmanaged. An investor cannot invest directly in an index. They are shown for illustrative purposes only, and do not represent the performance of any specific investment. Index returns do not include any expenses, fees or sales charges, which would lower performance.
All investments contain risk and may lose value. Equities may decline in value due to both real and perceived general market, economic and industry conditions. Investing in foreign-denominated and/or -domiciled securities may involve heightened risk due to currency fluctuations, and economic and political risks, which may be enhanced in emerging markets.
The S&P 500® is an unmanaged index of large companies, and is widely regarded as a standard for measuring large-cap and mid-cap U.S. stock-market performance. Results assume the reinvestment of all capital gain and dividend distributions. An investment cannot be made directly into an index.
The Dow Jones Industrial Average® (The Dow®), is a price-weighted measure of 30 U.S. blue-chip companies. The index covers all industries except transportation and utilities.
The MSCI Emerging Markets Index captures large and mid cap representation across 24 Emerging Markets (EM) countries. With 1,138 constituents, the index covers approximately 85% of the free float-adjusted market capitalization in each country.
The MSCI EAFE (Europe, Australasia & Far East) Index is a free-float adjusted market capitalization index that is designed to measure developed market equity performance, excluding the U.S. and Canada. These indices are unmanaged. They are shown for illustrative purposes only, and do not represent the performance of any specific investment. Index returns do not include any expenses, fees or sales charges, which would lower performance.
The Bloomberg Barclays U.S. Municipal Index covers the USD-denominated long-term tax exempt bond market. The index has four main sectors: state and local general obligation bonds, revenue bonds, insured bonds and prerefunded bonds.
The Bloomberg Barclays Emerging Markets Local Currency Government Index measures the performance of local currency Emerging Markets (EM) debt.
Bloomberg Barclays U.S. Government/Credit Bond Index includes securities in the Government and Corporate Indices. Specifically, the Government Index includes treasuries (i.e., public obligations of the U.S. Treasury that have remaining maturities of more than one year) and agencies (i.e., publicly issued debt of U.S. Government agencies, quasi-federal corporations, and corporate or foreign debt guaranteed by the U.S. Government).
The Bloomberg Barclays U.S. Aggregate Bond Index is a broad-based flagship benchmark that measures the investment grade, U.S. dollar-denominated, fixed-rate taxable bond market. The index includes Treasuries, government-related and corporate securities, mortgage backed securities, asset-backed securities and corporate securities, with maturities greater than one year.
The Bloomberg Barclays Global Aggregate Bond Index is a flagship measure of global investment grade debt from twenty-four local currency markets. This multi-currency benchmark includes treasury, government-related, corporate and securitized fixed-rate bonds from both developed and emerging markets issuers.
The Bloomberg Barclays Intermediate Govt/Credit Bond Unmanaged index that tracks the performance of intermediate term US government and corporate bonds.
The Bloomberg Barclays US Treasury Inflation-Linked Bond Index measures the performance of the US Treasury Inflation Protected Securities (TIPS) market.
The Russell Midcap® Index measures the performance of the mid-cap segment of the U.S. equity universe. The Russell Midcap® Index is a subset of the Russell 1000® Index. It includes approximately 800 of the smallest securities based on a combination of their market cap and current index membership.
RUSSELL MIDCAP® GROWTH: The Russell MidCap® Growth Index is designed to track those securities within the broader Russell MidCap Index that FTSE Russell has determined exhibit growth characteristics.
RUSSELL MIDCAP® VALUE: The Russell MidCap® Value Index is designed to track those securities within the broader Russell MidCap Index that FTSE Russell has determined exhibit value characteristics.
RUSSELL 2000®: Russell 2000®Index measures the performance of the 2,000 smallest companies in the Russell 3000® Index, which represents approximately 11% of the total market capitalization of the Russell 3000® Index.
The Russell 3000 Index measures the performance of the largest 3,000 U.S. companies representing approximately 98% of the investable U.S. equity market. The Russell 3000 Index is constructed to provide a comprehensive, unbiased and stable barometer of the broad market and is completely reconstituted annually to ensure new and growing equities are reflected.
RUSSELL 1000®: Russell 1000® Index measures the performance of the 1,000 largest companies in the Russell 3000® Index, which represents approximately 89% of the total market capitalization of the Russell 3000 Index.
RUSSELL 1000® GROWTH: Russell 1000® Growth Index is designed to track those securities within the broader Russell 1000 Index that FTSE Russell has determined exhibit growth characteristics.
RUSSELL 1000® VALUE: Russell 1000® Value Index is designed to track those securities within the broader Russell 1000 Index that FTSE Russell has determined exhibit value
Russell Investment Group is the source and owner of the trademarks, services marks and copyrights related to the Russell Indexes. Russell® is a trademark of Russell Investment Group.
Bloomberg Barclays US Corporate Bond Index measures the investment grade, fixed-rate, taxable corporate bond market.
The VIX Index is a calculation designed to produce a measure of constant, 30-day expected volatility of the U.S. stock market, derived from real-time, mid-quote prices of S&P 500® Index (SPXSM) call and put options.