“Roads were made for journeys, not destinations.” ~ Confucius
Question: Are we on a solid road to recovery, or should we expect further disruptions?
Answer: The last six months have been quite the journey with many preferring that we could have bypassed the pandemic and the twists and turns it brings to our lives. Because there will likely be additional bumps ahead, it is helpful to focus on our forward motion rather than remain looking in the rearview mirror to arrive at your destination.
It was 80 years ago this month that the Pennsylvania Turnpike opened, bringing the United States its first highway. Highways provide economic growth due to the connectivity, speed, and efficiency they provide.
The recent road to recovery has been under construction since hitting an economic bottom in April. Now, with the fastest and most economically destructive recession in modern history likely behind us, growth revved yet there are still many miles to go before we’re back to pre-COVID levels. The recovery is unfolding in a K-shaped pattern, where different parts of the economy recover at differing paces and magnitudes. The pandemic favors certain sectors and industries more so than others, allowing certain companies like e-commerce, medicine, and air freight to enjoy the express lanes while forcing others such as airlines, hospitality, and leisure to experience gridlock. A vaccine could alleviate the psychological impact of the virus, but even if a safe, effective candidate is approved by year-end, it would likely only be available for certain subsets of the population in essential services, with widespread distribution not occurring until mid-2021.
Jobless claims remain elevated, with most of the lost wages in lower-income brackets. It appears that stimulus deal negotiations reached a roadblock until after the election. In contrast, the Federal Reserve has vowed to maintain accommodative monetary policy and keep short-term interest rates near zero through at least 2023. In this low yield environment, caution may be appropriate in the high-yield bond sector due to rising default risk and sector exposure.
For stock investors, valuations cause questions regarding the sustainability, breadth and vitality of the second strongest bull market in U.S. stock market history. Estimates are supported by low-interest rates, optimism for a vaccine, therapeutics, and a rebound in earnings growth in 2021. Sector focus is cautioned; case in point, technology sector earnings could benefit from the building of the 5G highway, artificial intelligence, driverless cars, and a continuation of the work-from-home trend.
Other more traditional value sectors such as Energy, have a cloudier outlook as the rebound in economic growth hasn’t boosted demand for transportation fuels back to pre-pandemic levels. Numerous countries and U.S. states are still engaged in modified lockdowns.
The outcome of the presidential race is at the forefront of investors’ minds. For incumbent President Trump, a unique, the COVID induced recession and unemployment levels threaten reelection efforts. However, a strong third-quarter GDP report released just five days ahead of the election could provide the boost he needs. Former Vice President Biden currently has the edge, but this election cycle is beyond unusual, from the debates to the final counting of results.
No matter what the outcome, the winner of the White House is only one factor in determining asset allocation and sector positioning. The economy, earnings growth, Fed policy, and underlying secular trends combined create a more robust outlook. In fact, many generally accepted doctrines have proven to be inaccurate, such as Democrats being best for the economy—not always—the Energy sector performing best under Republicans—not recently—and tax hikes causing negative equity performance—not in the post-World War II era.
If nothing else, this year taught us to expect the unexpected. A disciplined strategy and asset allocation parameters should serve as guardrails to help keep a portfolio from going off-course. In addition, an uncomfortable level of portfolio risk may be an opportune time to pull over and reassess the route ahead. Having your advisor serve as a co-pilot to help with directions is beneficial, but it is especially prudent when navigating the uncharted territory we find ourselves in today. This upcoming quarter will move quickly—from the hopeful further reopening of the economy to Election Day and the holiday season that follows. Stay focused and plan accordingly.
There is no assurance the trends mentioned will continue or that the forecasts discussed will be realized. Past performance may not be indicative of future results. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. The opinions expressed are those of the writer as of October 7, 2020, but not necessarily those of Raymond James and Associates, and subject to change at any time. All information provided herein is for informational purposes only and is not intended to be, and should not be interpreted as, an offer, solicitation, or recommendation to buy or sell or otherwise invest in any of the securities/sectors/countries that may be mentioned. Investing involves risk and you may incur a profit or loss regardless of strategy selected, including diversification and asset allocation.
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