Q3 2020 Review Banner

2020 Q3 Market Review

Q3 2020 Review Banner

Despite a prolonged pandemic caused by the coronavirus outbreak, U.S. stocks continued to rebound in 2020's third quarter. For the second consecutive three-month stretch, patient investors who were able to tune out alarm bells sounded by traders and other financial pundits found reason to stick with their strategic investment plans. 

From July through September, domestic stocks kept advancing across all asset classes and market capitalization sizes as captured by IFA's representative indexes. So did benchmarks covering international equities, both in developed and emerging markets. Also landing in positive territory in Q3 were sister IFA fixed-income indexes. 

This was quite a turnaround from earlier in the year. In the first quarter of 2020, the blended IFA U.S. Large Company Index slid by nearly 20% (-19.60%). At the same time, the large-cap focused IFA International Value Index returned -31.98%.

Following Covid 19's initial shock, however, business activty picked up. Across the board, IFA indexes produced double-digit percentage returns in Q2, marking a relatively dramatic reversal in fortunes. Such momentum continued into late summer and early fall, although by Q3's close news headlines were warning of anxiety over a looming presidential election and political gridlock in Washington. 

Of course, such topsy-turvy movements in markets served as another example of how volatile stocks can turn over shorter timeframes. We know from leading academics like Nobel Laureate Harry Markowitz, who is often referred to as the father of Modern Portfolio Theory, that investors shouldn't expect greater returns without accepting higher levels of risk into their portfolios.

It's not surprising, then, to find behavioral scientists warning that trying to invest based on temporary price fluctuations can drive people to follow their worst impulses. Fear and anxiety often lull investors into a false sense of confidence that they'll be able to successfully become what we refer to as "time pickers."  

In particular, we're partial to a research series by Dalbar Inc. The goal of this annual report ("Quantitative Analysis of Investor Behavior") is to shed light on how investors can improve portfolio performances by managing behaviors that cause them to act imprudently. Using this data, the chart below shows the differences in performances and growth of $100,000 between a typical equity investor, various commercial benchmarks and the IFA Index Portfolio 100 over 20 years (through 2019).

These results serve to underscore our view that trying to time markets isn't a wise course of action. Instead, IFA's wealth advisors recommend that investors check to make sure they've got the right portfolio mix between stocks and bonds. Along these lines, we've developed a Risk Capacity Survey. This online tool is designed for both novices and those with more experience in financial markets. After all, life changes and so do individual circumstances. 

Domestic Equities

Domestic stocks continued to climb in the third quarter as all six of IFA's key domestic equity indexes landed on positive ground. Returns weren't as strong across-the-board as in the previous quarter, however. Still, U.S. large-cap growth produced a double-digit percentage gain (13%). On the low side, the IFA blended benchmark covering domestic small-cap stocks generated a return of 3.94% in the quarter.    

International (Developed) Equities

IFA index returns from developed markets that are outside the United States all remained positive in Q3, although at a slower pace than the previous quarter. Results ranged in the latest completed quarter from a gain of 9.68% for international small-cap blend equities to a return of 2% for international large-cap value stocks. 

Real Estate Equities

Global real estate was another upbeat performer in Q3. In 2020's third quarter, IFA's Global REIT Index returned nearly 2%. By comparison, the year's Q2 finished with an even stronger gain of 12.60%. 

Emerging Markets Equities

Just like developed foreign markets, stocks in emerging markets stayed positive in the third quarter. For Q3, emerging markets returns ranged from a return of slightly more than 10% for IFA's blended index of emerging markets small-cap equities to a gain of 4.75% for emerging markets large-cap value stocks.  

Fixed-Income

In the third quarter, the 30-year U.S. Treasury rate increased by 0.03 of a percentage point to 1.46% while the five-year U.S. Treasury rate decreased by 0.03 of a percentage point to 0.28%.

For Q3, all of the fixed-income benchmarks reviewed by IFA managed to stay in positive territory. Total returns ranged from 0.18% for the IFA Five-Year Global Index to flat (o.oo%) for the IFA Short Term Government Index. If interest rates have fallen, the price of existing bonds can be expected to increase – so that new buyers receive the same current yield as that available from newly issued bonds at the lower rate with similar maturities and risk levels.

IFA Index Portfolios

All of the returns of the IFA Index Portfolios shown below are net of the maximum annual 0.90% advisory fee through September 30, 2020. Despite positive performances across all key IFA equity and fixed-income categories, portfolios remained underwater through the initial nine months of the year. 

Each quarter, IFA monitors the funds it recommends for clients. As part of that process, we've developed a rating system. Below is a link to our Performance Monitoring Report for client portfolios: Third Quarter 2020 IFA Client Performance Monitoring Report.

We've created an Investing Kit that includes a copy of "Index Funds: The 12-Step Recovery Program for Active Investors" book and a documentary film based on the book. It also comes with a Galton Board (Stock Market Edition), which simulates the random distribution of 600 monthly returns of the IFA Index Portfolio 100. You can find the Investing Kit on Amazon.


Performance results for actual clients that invested in accordance with the IFA Index Portfolio Models will vary from the backtested performance due to the use of funds for implementation that differ from those in the index data, market conditions, investments cash flows, mutual fund allocations, changing index allocations over time, frequency and precision of rebalancing, not following IFA's advice, retention of previously held securities, tax loss harvesting and glide path strategies, cash balances, lower advisory fees, varying custodian fees, and/or the timing of fee deductions.

This is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, product or service. There is no guarantee investment strategies will be successful. Investing involves risks, including possible loss of principal. IFA Index Portfolios are recommended based on time horizon and risk tolerance. Take the IFA Risk Capacity Survey (www.ifa.com/survey) to determine which portfolio captures the right mix of stock and bond funds best suited to you.  For more information about Index Fund Advisors, Inc, please review our brochure at https://www.adviserinfo.sec.gov/