Equities moved lower this week, as surges in COVID cases throughout the US caused alarm, and fears of more shutdowns ahead rattled market participants. Outbreaks in California, Texas, Arizona, and Florida were particularly concerning, with numbers rising at exponential rates, threatening to overwhelm healthcare systems and potentially delay or disrupt reopening plans. A lack of rule following, such as not wearing masks in public gatherings and ignoring social distancing suggestions has continued to lead to widespread transmission throughout those states that were most lax with restrictions. Meanwhile, unemployment data was disappointing this week, however, durable goods orders surged, housing demand remains robust, and vaccine and treatment options continue to advance at a steady pace.
The risks to current equity prices remain ubiquitous, with the upcoming end the federal unemployment benefits and no additional stimulus scheduled, corporate profit season beginning soon that will show the effects of the worst quarter of the pandemic, the US presidential election moving into the final stages, and the virus flaring up again. These threats to the recovery are evolving rapidly, particularly infection rates. COVID’s impact on those states that are seeing a surge in cases is showing up in high frequency data, with restaurant reservations falling off and new unemployment cases rising, demonstrating that the recovery is likely to occur in stops and starts, instead of the steady reopening many had anticipated. Hopefully, the outbreaks can remain localized, and that crises like what was seen in New York can be avoided. We believe equities will likely be range bound for the remainder of the summer, as monetary policy has been effective at propping up prices and suppressing bond yields, but that fundamentals must catch up before more upside can be realized. With that said, we believe there is more risk to the downside and that the risk/reward in equities generally is not particularly attractive in the near term. There are still some areas that show promise, however, and we believe that over the medium to long-term, stock markets will outperform fixed income investments.
At this time, we have marginally trimmed the equity exposure in portfolios recently, bringing our allocations to slightly underweight stocks. These trades were made to take some profits off the table from the recent runup, as well as to provide additional cash available for anticipated volatility ahead. One area of global markets we are reviewing is potentially adding to select emerging market and European equities, where more successful containment of the pandemic could lead to a faster rebound and investment opportunities. Europe in particular has seen remarkable success in keeping their numbers down, whereas the US is now seeing cases push higher than the prior peaks seen in March. We will be watching closely as numbers unfold there, and determining whether an attractive entry point is upon us for a cyclical upturn in those locales. Valuations there also are meaningfully lower than their US peers, despite many companies’ resilient revenues and earnings potential. 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.