Equities took a breather this week from the post-election rally, as COVID continues spreading like wildfire throughout the US, leading to renewed lockdowns and closures for businesses. As we were warned since the beginning of the pandemic, the winter months will see a spike in cases and fatalities, particularly as precautions are largely ignored by much of the public. On the bright side, American’s finances are in the best shape in decades, with record low mortgage rates, cash from government aid, higher credit scores, and fiscal strength going into the crisis. While a lot of this wealth is concentrated amongst the highest earners, even working-class families are better off than expected. This could lead to a surprisingly robust rebound next year, as the reopening of the economy unleashes demand and consumers open their wallets. Countering the resiliency of US household’s balance sheets, however, several indicators showed this week that the recovery is slowing, as US unemployment claims ticked up, manufacturing expansion declined, and retail sales rose at the slowest pace in six months.
The economy finds itself caught up in several cross-currents at the moment, with the near-term prospect of a COVID resurgence and slower rebound countered by a likely powerful surge in activity when vaccines can be deployed and a return to normalcy can reignite growth. The recovery appears to be on track to resemble a “W”, where the first initial shock has been largely offset but the second dip is likely in front of us for the next two quarters. The question then becomes, are risk assets pricing in this reality of short-term pain but long-term opportunity? We believe it is likely to be a rocky road ahead, but remain optimistic about what is on the other side of this recession when the virus has been largely contained. Corporate America has been incredibly resilient in the face of significant adversity, cutting costs, beating earnings expectations, and providing positive guidance for the year ahead. While the recovery will likely be uneven across geographies and sectors, policy support from governments and central banks only further adds to our positive conviction.
We continue to tactically rebalance portfolios, believing that the shift in market leadership from technology and defensive stocks to more cyclical parts of the global economy will remain the theme for the next several quarters. Small company stocks, international equities, and companies with deeply discounted share prices appear attractive to us at this time, as the promise of powerful vaccines, a resilient consumer, and the prospect of a strong rebound next year could lead to outperformance of these laggards. Add to that the prospect of additional fiscal stimulus and central banks promising seemingly endless liquidity, and markets look poised to move higher from here. We do believe some pullbacks are likely, but see them mostly as buying opportunities more than longer-term declines. 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.