Stock markets moved higher this week, with the Nasdaq hitting a new record high and significant flows into the riskier parts of the market persisting. The rebound since the March low now represents the biggest 50 day rally in history, with an almost 40% gain for the S&P 500. Despite all the optimism, Americans continued to file for unemployment benefits, with another nearly 2 million applying for assistance. Worse still, those continuing to receive benefits increased, while analysts had estimated a decline, expecting more workers to return back to the economy. More policy support was also announced this week out of Germany, as the European Central Bank announced an additional 600 billion Euros in bond purchases to help prop up the struggling Eurozone economy. Meanwhile, US corporations have been issuing record amounts of debt, taking advantage of low rates spurred by Federal Reserve actions, having borrowed more than $1 trillion dollars thus far in 2020, the fastest pace on record.
Our main focus at this time is on the major shifts occurring within markets, that are not fully reflected in the headline numbers. In the past several weeks, the rotation of investor funds from defensive, high-growth stocks into more cyclical, low-growth, value stocks has been remarkable. Sectors such as technology, consumer discretionary, and health care have lost momentum, while industrial, financial, and energy companies have rallied significantly. There are several reasons behind the moves, but they are primarily driven by the extremely low valuations companies in those sectors were trading at, and increasing expectations for a sharp recovery ahead. News that the virus’ spread is slowing in the US and other developed nations has given investors reasons to cheer, with almost all asset classes showing signs of conviction in the current rally. From a weakening dollar, to surging small-cap companies and emerging markets, to bond yields, the green light appears to be signaling the worst is behind us. This risk-on feel certainly does not reflect the current situation in the real economy and main street USA, but we must remember that markets are forward-looking.
At the present time, we are riding the current wave of optimism in portfolios, though we continue to question the exuberance. With losses nearly eliminated in portfolios, we are fast approaching the record highs seen in the beginning of 2020 across markets. Meanwhile, US-Chinese relations continue to sour, dire unemployment figures give an uncertain outlook, a major US election is right around the corner, and there is the obvious risk of a resurgence in infection rates. Given these risks, we continue to maintain our equity allocation at neutral levels, but have made some small adjustments to take a balanced approach to harnessing more of the rotational shift to discounted shares and smaller companies, while at the same time increasing our allocation to Treasuries as “insurance” against a potential return to higher volatility ahead. While a near-term shift to these more sensitive areas seems appropriate, our conviction in the longer-term trends of innovation-led companies and healthcare continue to dominate portfolio holdings for now. As always, we continue to remain extremely focused on monitoring unfolding market dynamics and reacting only when appropriate. Please feel free to call our office with any questions you may have.