In the September issue of our monthly flagship publication, we feature:

  • On the Record by Chief Investment Officer Tony Roth, where he details a disconnect between the stock market and the economy, the underlying associated risks, and how our focus on three pillars—economics, a long-term investment horizon, and risk mitigation—continue to guide our portfolio positioning.
  • In Focus by Head of Investment Strategy Meghan Shue addresses some of the most pressing questions on our clients’ minds as the relate to politics, policy, and portfolios.
  • Investment positioning and domestic equities asset class overview.

 

Notwithstanding the correction in the first week of September, the stock market’s impressive rise this year has continued with seeming disregard for the immediate woes of the economy. The S&P 500 returned 35% from April through August of this year—the best five-month run for U.S. large-cap equities since 1938. Even more impressive has been the performance of tech stocks, which have returned 55% over that period for a year-to-date return of 39%, despite (or perhaps because of) the global pandemic. The S&P 500 returned 7% in August alone, a month that typically suffers from weak seasonality and low liquidity. The stock market is rightly focused on the early bounce in the economic data and rapid progress of COVID-19 vaccine development, but there are risks. Now, as underlying risks associated with both the pandemic and the election persist, this is a time to adhere to the key investment principle of discipline. Our focus on three key pillars—economics, a long-term investment horizon, and risk mitigation—continue to guide us toward a somewhat cautious but by no means overly defensive portfolio positioning.

Reasons for optimism

Recent months have witnessed continued progress on the COVID-19 vaccine front, with surprisingly few hiccups or disappointments to date. Our work and discussions with medical experts leave us optimistic that we will see more than one vaccine approved by the Federal Drug Administration for distribution by the end of 2020. Prospects for a “medical miracle” by year end have powered stocks higher.

We also observe that investors are operating under the assumption that fiscal relief from Congress will be both forthcoming and adequate to continue the economy’s recovery. We too believe that a fiscal aid package in the ballpark of $1.5 trillion will come to fruition in the next month. Where we express caution is in recognizing how dependent on additional aid the economy remains, particularly small businesses and lower-income households.

Vaccines and stimulus are important supports for the market, but timing is key. I would draw the analogy to a flooded basement. The higher the waters rise and the longer they sit, the more permanent the potential damage to the structural integrity of the building. Similarly, the longer Congress waits to pass another relief bill or a vaccine takes to inoculate the population, the more lasting we would expect the economic damage to be in the form of small business bankruptcies and permanent job losses.

 

 

Please see important disclosures at the end of the article.

Download Article