Equity markets were generally higher this week, as data from several COVID vaccine trials looked promising and earnings reports were in line or above estimates for most major banks. At the same time, COVID numbers are soaring in several hot spots both in the US and abroad, primarily in those areas that reopened most aggressively and who continue to avoid basic precautions such as mask wearing. Economic data showed generally positive figures, as business optimism climbed significantly higher, manufacturing increased, retail sales surged, and a moderate rise in prices pointed to a healthy amount of inflation. However, this data is backward looking, and more current, high-frequency data is showing that the recovery may be slowing rapidly due to the new outbreaks. Most importantly perhaps, the employment picture remains muddled, with new claims for unemployment continuing to increase but those already on claims falling more than forecast.
A confluence of factors are making the outlook more uncertain than ever, while US stock markets sit not far from all-time highs. Stronger than expected economic data, unprecedented monetary and fiscal stimulus, and hopes for a cure to COVID continue to face a global pandemic with rolling shutdowns, hits to corporate profits and revenues, and a potential end to unemployment benefits in coming weeks. Adding to that pressure, a major US election is now just months away. Abroad, tensions continue to simmer between China and the US, and the European Union appears to be on the path to further integration, a potential positive outcome for the region. The struggle between the winners from an ongoing lockdown and those that would benefit from a reopening are apparent beneath the surface of equity markets, where day to day swings between these two camps shift violently depending on incoming data. Defensive sectors such as large technology companies with growing profits and hordes of cash dominate indices and have outperformed, while companies most sensitive to an upswing lag and face solvency questions. These dynamics favor a very active approach in security selection at this time, unlike years past where the rising tide from central bank liquidity lifted all boats.
We are continuing to rebalance portfolios to be optimally positioned for the current environment. We believe that the virus will ultimately come under control through a vaccine, treatment, and social policy, but that the economic fallout will be severe in the meantime. The restart in activity will likely occur in a stop and start fashion and last many years, as the virus makes it way around the globe. Corporations’ abilities to manage this new reality will ultimately show up in their bottom line, and there will be clear winners and losers going forward. Adaptability is key in this environment, and the same applies to our investment portfolios, which are evolving alongside the changing landscape. In the equity sleeve, we prefer maintaining an overweight to technology and growth companies that have continued to thrive during the shutdown, and who have strong longer-term prospects. At the same time, other areas of global equity markets look extremely undervalued should the rebound be sharper than expected, so we’re weighing whether that presents opportunity or a value trap. Meanwhile, we have increased the quality of our fixed income holdings in select portfolios to hedge against future volatility ahead. 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.