Equities dropped this week, as the resurgence of COVID cases in Europe and the US caused alarm for investors who fear draconian lockdowns could re-emerge across the developed world. Markets saw some of the most extreme selling on record, with Wednesday’s fall the worst since June, with all but 15 stocks in the S&P 500 falling. Volatility spiked back to levels not seen since the crisis earlier this year. Interestingly, Treasury yields have continued to climb despite the selloff, indicating perhaps the risk-off tone is not as strong as would seem, with haven buying limited. If anything, Treasuries appear to be offering up some opportunity at this time, with 10-year bonds now offering the highest yields in 5 months. Meanwhile, on the economic front, GDP last quarter grew at the highest rate in history and slightly above estimates. Employment data backed up this number, with claims falling on trend and Americans continuing to get back to work. Meanwhile, alternative data such as mobility measures, are showing a decline over the last few months, causing concern that the direction of travel may not be a straight line higher. With consumers staying home more, several areas of the economy are thriving, with home DIY retailers, take-out, and tech firms holding up nicely, while high-end clothing, office supply firms, and oil producers suffer. Despite the conflicting signals, corporate earnings from 3rd quarter continue to roll in, with the overwhelming majority of firms outperforming, and the level of earnings beats the highest in years. Corporate America looks surprisingly resilient during COVID, though guidance on future earnings remain unclear and dependent on the three major unknowns ahead: COVID’s spread, the US election, and the size and timing of potential fiscal stimulus in the months to come.

We believe that despite the current selloff, there are reasons to remain optimistic about the recovery. While the COVID numbers are alarming, shutdowns in the US are very unpopular and unlikely in our view. Hospitalization rates are climbing but treatment options have increased dramatically, and a vaccine is likely around the corner in the coming months. More importantly, the election should hopefully be behind us in a matter of weeks, which will eliminate one uncertainty that has been weighing on investors for months. Stimulus, or at least a package to stabilize the economy through what could be a tough Winter, looks likely once the election is over. For now, our portfolios have raised substantial amounts of cash in the past several weeks and are now positioned to take advantage of volatility ahead. We are maintaining a high quality bias in both our equity allocation as well as fixed income, as the economy remains shaky and our preference is to own those companies or debts that have more stable cash flows behind them despite the current environment. As the dust settles from the election, adjustments will be made based on likely policy actions out of either administration. 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.