Review the latest Weekly Headings by CIO Larry Adam.
- Asset allocation & perspective should go ‘hand-in-hand’
- Shutdowns ‘played into’ certain sectors’ ‘hands’
- Need ‘all hands on deck’ to mitigate new cases
Yesterday was National Handshake Day, a day that hopefully wasn’t practiced and was instead replaced with extra hand washing and plenty of sanitizer! Sadly, even after the health crisis is over, I would not be surprised if this holiday, or even the gesture itself, becomes less celebrated. The rampant spread of COVID-19 across the globe made us acutely aware of our hygienic practices as they relate to the spread of disease, and I suspect the virus will have a long-lasting impact on our interpersonal interactions. Before the outbreak, I was traveling on a weekly basis in order to present our economic and financial market outlook to our firm’s clients face-to-face. Now, these conversations are occurring through video conferencing and webinars instead, and likely will be for the foreseeable future. We miss meeting with investors in person, but in the meantime we hope our ongoing investment insights lend you a hand as you navigate portfolio decisions during this prolonged period of uncertainty.
- Bottom Line: Keep Perspective At Hand | Having a carefully crafted asset allocation is critical to help achieve long-term investment goals, but garnering perspective during times of heightened uncertainty should be considered an essential strategy too. The COVID-19 outbreak led to overwhelming levels of concern and a historic surge in market volatility, most of which was exacerbated by news headlines. Once the panic-driven market movements were subdued, optimism regarding the economic recovery and status of the virus within the US took over, leading the S&P 500 to rally more than 38% from its low on March 23. This historic rebound has put the index on pace to notch its best quarter since 1998. This week, concern about the rise of cases in new ‘hotspot’ cities and the accompanying threat to the speed at which the economy can recover revived investor concern. With valuations, overall, elevated from historical averages, it is important to put these concerns into perspective. We have stated we are in a ‘show me’ period for the equity market, where both economic and earnings growth would have to confirm or exceed the heightened optimism priced into the market. While the market has been range bound for the last three weeks or so, the strong recovery thesis is likely to be tested by macro data (ISM & jobs) next week and corporate earnings starting the week of July 13.
- Can The Economy Shake-Off The Shutdowns? | Once states began the reopening process, widespread optimism lifted equity markets, seemingly underappreciating the financial distress the lockdowns had imposed on a number of industries. By now, most businesses have reopened their doors but this does not translate into an immediate return to pre-COVID-19 levels of operation. We maintain our belief that the path to economic recovery will resemble the shape of the letter “K,” with some industries thriving during the crisis, some experiencing a quick rebound, some undergoing a psychologically-induced delayed rebound, and others, unfortunately, unable to survive—evidenced by US commercial Chapter 11 bankruptcy filings rising 48% on a year-over-year basis. Certain sectors and industries have had the good fortune of being market favorites not only during the shutdown but also during the early stages of the recovery. The top five holdings of the S&P 500, all of which are tech-oriented companies, have outperformed the other 495 companies by an average of 38% (26% vs -12%) year-to-date, and by 14%, on average, (6% vs -8%) since the recent June 8 peak. Typically, this level of outperformance would make us more cautious, but tech valuations, surprisingly, remain attractive. The current P/E multiple of the Technology sector is modestly above that of the S&P 500 index—but it usually is. Currently, its relative P/E to the S&P 500 in line with its 15-year average, all the while having more stable and visible earnings expectations given the long-term growth catalysts that are still intact (e.g., the rollout of 5G).
- Is The Rise In COVID-19 Cases Out Of Hand? | In regards to reopening, the US should have benefitted from the earlier successes and failures of plans in Europe and Asia. But over the last few days, more than a dozen states saw a notable rise in the number of cases and nearly half of those states experienced an uptick in the positive test percentage. Disappointingly, the US, in aggregate, has not experienced a significant, prolonged downward trend in new cases as seen in countries like Italy and Spain. While a slight rise was expected in light of eased restrictions, recent trends suggest the first wave is not over and that an ‘all hands on deck’ approach is needed to prevent new epicenters from forming. From a more constructive perspective, the daily death count remains relatively stable (likely because of better care protocols), and the case count trajectory in states such as New York, where lockdown procedures and reopening guidelines were firmly followed, gives us hope that that we can reverse the paths of these recent developments. Specific regions or cities may still need to once again implement or adjust (e.g., Texas) social distancing restrictions to prevent hospitals from reaching full capacity, but we believe a nationwide or state level lockdown can still be avoided. The next two weeks remain critical—but the primary focus will be on hospitalizations and deaths.
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