In the October issue of our monthly flagship publication, we feature:
- On the Record by Chief Investment Officer Tony Roth, where he explains why the best investors are often those who don’t succumb to emotional decisions, as well as the upcoming elections and their likely effects on markets and the economy.
- In Focus by Investment Strategy Associate Evan Kurinsky does a deeper dive on the importance of maintaining a long-term lens and why diversification remains one of the most powerful tools to help achieve long-term investment success.
- Investment positioning and domestic equities asset class overview.
Emotions have no place in investing. The best investors are often the most objective and have ice in their veins. For many on both sides of the aisle, however, the president’s positive COVID-19 result adds further anxiety and ambiguity to a historically tense moment. With the ongoing pandemic, a weakening economic recovery, and of course the upcoming elections, emotions are understandably running high.
Our reaction is straightforward: Filter out the emotion by sticking with our process. We analyze the economic data, build our economic and asset class forecasts, speak with companies and investment managers, and debate the path forward as a team. With this foundational approach and a deep appreciation for the precariousness expected over the next few months, we are maintaining a slightly cautious posture in portfolios. This is a time to batten down the hatches and “quarantine” portfolios, in a matter of speaking. The storm will pass and we will be thankful for having ridden it out with our portfolios largely locked onto our long-term targets.
Running out of steam
The month of September was the first indication that the market’s euphoria may be tempering. We witnessed a modest but healthy pullback in U.S. large-cap equities of -9.5% peak to trough, which began as a shunning of high-flying tech stocks but morphed into skepticism about the trajectory of economic growth. Yet, the S&P 500 still ended the third quarter up 8.5%. We are not discouraged by some of the air being let out of the balloon, but we continue to observe an economy that is suffering more than the public equity market would have you believe. We remain cautious on the short-term path for risk assets (stocks).
Since March, the market has been supported primarily by three pillars: monetary stimulus, a bounce in the labor market, and fiscal stimulus. Monetary accommodation of global central banks remains firmly in place, and we continue to believe the Federal Reserve will support financial conditions by whatever means necessary. Still, there is a high bar for the Fed to unveil additional stimulus and further reflate asset prices at this juncture.
The other two pillars appear to be on more fragile footing. The U.S. has recouped approximately half of the 22 million jobs originally lost amid the economic lockdown. However, the September labor report reveals major challenges in the jobs recovery. Most important, the number of permanent job losses continues to mount at a rate without precedent in modern recessions. In addition, the pace of improvement in small business hiring has slowed dramatically, and bankruptcies are ticking up as businesses are forced to permanently shutter their doors. Indicators of small business employment trends (those with fewer than 50 workers) paint a picture that is still bleaker than the depths of the global financial crisis. And large companies like Disney, Allstate, and United Airlines have announced significant numbers of layoffs in recent days. For all the jobs-market strength we saw over the summer, we are concerned that we are now seeing a leveling off in private payrolls far below pre-COVID levels.
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