Market Strategy 10/12/2020

From the perspective of its historical timeline the sector appears to be particularly attractive. We view today’s technology as parallel to the automobile in the early part of the 20th century. Information technology today is deeply embedded in the lives of businesses, individuals, governments and all of the other ten sectors. Technology today is not so much changing who we are as human beings but how we execute or how we do the things we do. It is changing the tools we use to work, to study, and to learn, to create, to design and to build, to relax, heal, and to ponder (gather and analyze information) and much more.

Current efforts by both political parties to regulate the sector remind us of earlier historical points on the timeline when the food industry, the health care sector, the railroads, the automobile industry and others came under the examination of governmental regulation. The key issue for technology ahead will be how effective regulation in the space will be in protecting the user of technology while not hurting innovation and profitability.

With China’s emphasis (as well as the rest of the world’s focus) on the importance of technology it would seem pure folly for either the Republicans or the Democrats to deter the progress and leadership of US technology. We rate the information technology sector Outperform.

Consumer Discretionary is a sector in transition moving from analog to digital platforms and a combination thereof to engage its customers, suppliers and its employees. With the consumer of key importance to the US economy (both as service provider as well as employer) politicians on both sides of the aisle would be wise to consider the health and profitability of the sector in any policymaking that could damage the future prospects of the sector. We rate the sector Outperform.

Industrials are a sector key to manufacturing, infrastructure, construction, robotics, energy, aerospace, outer space (satellites, space travel), railroads and trucking equipment, agriculture and defense. The sector has been reinvented over the past decade by technological innovation. The industrials sector ranks among our favorite sectors, with an Outperform rating. With both parties favoring infrastructure spending the importance of the products and services the space offers make it in our view a key sector for a diversified portfolio regardless of which party is victorious in the upcoming election.

Financials – a sector made up of institutions including traditional banks, investment banks, money management firms, insurance companies, and several US credit card issuers among other financial sector players. The sector has been under pressure from historically low interest rates affecting the yield curve over the past decade and currently from concerns that should the economy move deeper into the Covid-19 induced recession the Federal Reserve might raise reserve requirements. If “money makes the world go ‘round” (and we believe it does from an economic, market and societal prosperity perspective)—politicians from either party should consider the importance of these economic institutions to the economy as drivers of business, labor, states and cities and the Federal government itself before making policy decisions. We currently rate the sector Outperform on expectations that an economic recovery lies ahead with the potential of an introduction of a vaccine to effectively stem the spread of COVID-19. In our view the sector has political risk should the Democratic Party win the White House and pivot from center to progressive policies which appear hostile to the sector.

Consumer Staples—this defensive sector is comprised of companies involved in what’s commonly known as “essential products” that in their importance to the lives of their constituency make the sector “counter cyclical” or less sensitive to downturns in the economy. Products include foods and beverages (both alcoholic and non-alcoholic), tobacco, household goods, and hygiene products. Drug store and supermarket chains are among the companies included in this sector known to some in the analytical community as “cokes, smokes, and soaps.”

Materials—a sector made up of companies that make or process chemicals, construction materials, forest products, packaging products, glass, and paper. The sector includes companies involved in mining, refining, and processing metals and minerals. The sector is well positioned to benefit from infrastructure spending stateside and from a global economic recovery beyond Covid-19. The sector could come under pressure with an increase in environmental regulation. We rate the sector favorably with a Market Perform rating.

Communications Services—a sector made up of a diverse collection of businesses ranging from major players in internet services, advertising and media, and telecommunications services. Over 40% weighted in several tech-related members belonging to “the FANGS” the sector near term will remain in the cross hairs of regulation regardless of the outcome of the election in November. That said, the importance and popularity of the services many of the companies in the sector provide to the US consumer suggests that ultimately the companies under scrutiny will not only survive but likely prosper even under an increased burden from regulation so long as it doesn’t damage the innovation process that drives them and attracts investors to them. The sector includes the major telecommunication companies in wireless with broad exposure to 5G. We rate the sector Market Perform. 3

Energy—a sector made up of stocks related to the discovery, production, refining, marketing and distribution of energy. Among its members are the integrated oil companies, refiners, explorers and oil and gas services companies. While the sector is responsible for producing and distributing most of the energy utilized by businesses and consumers stateside and around much of the world it has fallen into disfavor among investors over the past decade as a result of the development and deployment of alternative energy resources and increased environmental oversight. With extensive infrastructure to produce and deliver its products we expect the energy sector to remain “king of the energy complex” for some time into the future though “king” of an increasingly shrinking kingdom over the years ahead. A Republican victory in the upcoming election would likely be more favorable for the sector than a Democratic win. We rate the sector Underperform.

Health Care—the sector includes pharmaceutical companies, medical equipment and diagnostic companies, biotechnology companies, hospital companies and medical insurance companies. Both Republicans and Democrats have their “pencils” sharpened with regards to the cost of drugs and health care services. A Republican victory would likely be more favorable to the healthcare complex while a Democratic win would likely be less favorable. However, the longerterm effect of governmental increased focus on drug prices and medical products and services costs might likely see a reduction in unit pricing made up in volume (usage) as healthcare products and services become more widely available. The extent of government intervention in the sector will be critical as to the effects positive or negative on profitability and innovation within the sector. We rate the sector Market Perform with risks noted.

Utilities—the sector is comprised primarily of companies that produce and deliver services tied to electricity and natural gas. The sector is considered both a defensive sector because of the essential nature of its services and as a bond proxy because of the dividends that many utility companies pay. A Democratic victory could negatively affect utilities should tax policy favoring dividend income be eliminated. Utility companies could also be negatively affected by increased regulation and environmental oversight. Traditional electric utilities produce energy via oil, natural gas, coal, and nuclear energy—all of which are likely to come under increased scrutiny and regulation in the event of a Democratic victory.

The real estate sector includes real estate investment trusts (except mortgage REITS which are part of the financial sector) and companies that manage and develop properties. As a sector it is often utilized as a diversifier toward real assets and as a bond proxy for income. As a bond proxy the sector is known to come under selling pressure from investors when interest rates rise.

The sector could come under pressure with changes to the tax code under consideration by the Democrats. A Republican victory would likely be neutral to positive for the sector. We rate the sector Market Perform.