Market Strategy 6/22/2020

Key Takeaways

• The road back to “normal” now appears longer as Covid-19 continues to hold economies hostage even as they re-open.
• With bond yields near or at historic lows equities remain a key focus for goal-oriented investors.
• Last week’s economic data continued to show evidence of the US economy’s resilience in the face of significant challenges as the economy moves toward reopening.
• The process of globalization is likely to expand further as the world moves away from a one-country-centric global supply chain.

A resurgence of Covid-19 cases as economic re-openings take place stateside and around the world is raising concern and fortunately causing some government officials and their constituencies to take note. Responses vary, but one thing that appears to be increasingly clear is that the process of reopening economies will not be as easy as turning on a light switch but rather will be like traversing a landscape of hurdles across the globe.

From an anecdotal perspective as well as assessments of the situation made by medical professionals interviewed by the media over the past week facemasks, social distancing and sheltering in place may be part of life for longer than had been expected.

Along with the usual suspects that make up the “wall of worry” that the equity markets have climbed since March 23 a key challenge is how to “get back to normal” or at least to a “new, new normal” economy without triggering unmanageable resurgences of the virus that holds the global economy hostage.

Last week saw stocks worldwide navigate challenges and move higher as positive developments offset setbacks.

As different as the Covid-19 pandemic crisis is, the process of righting the ship in the storm remains similar to other economic and market shocks that have appeared across the timeline of history.

The process of getting out of the proverbial ditch is challenging and progress is often met by setbacks. History has shown that keys to success for investors at times like these are patience, commitment, diversification and perseverance.

We have found in our experience traversing nearly four decades in the markets that knowing what you own, why you own it and having right-sized expectations of how what you own might perform in times of transition to be practical and helpful.

A brace of economic data for investors to ponder is scheduled to be released this week related to manufacturing, home sales and prices, mortgage applications, wholesale inventories, durable goods orders, GDP, personal spending, inflation and consumer sentiment and expectations. In addition, the Federal Reserve will announce the results of its stress tests of the big banks on June 25.

With the bulk of Q2 earnings season several weeks away when the big banks begin to report, market participants will likely stay focused on the day to day developments in the pandemic situation as well as those on the political and geopolitical front.

Equity valuations continue to be higher than most investors and traders would like to see but prospects for valuations to move lower when consensus analytical projections begin to rise as the domestic and global economy emerges from the pandemic appear likely if not on the immediate horizon.

With yields on many of the components in the fixed income complex at or near historic lows on a global basis investors will likely find it somewhat difficult to achieve their goals and objectives without exposure to equities.

With prospects that the global supply chain will diversify away from its one-country centricity (China) as a result of the trade war and the effects of the global pandemic on businesses, the process of globalization is likely to expand further rather than to contract. An expansion or further diversification of the process of globalization will likely serve to the benefit of many countries in the developed and emerging markets.

While businesses tied to national security and domestic health are likely to be in the forefront of a reshoring of activity stateside, the cost of labor and production will likely keep many other types of manufacturing facilities in foreign countries. With the consumer accustomed to affordability and “deals and steals” in the basket they fill when it comes to many day to day goods and nonessential services they purchase—globalization in our view will remain solidly entrenched stateside and across the world.

We expect a world working through such transitional processes will provide significant opportunities for investors to consider. Such transitioning will naturally generate risk and volatility as well. That should come as no surprise to anyone except for the very inexperienced.

We remain diversified in our investment portfolios; maintain an overweight in equities versus fixed income; and favor cyclical sectors over defensive sectors.

Our favorite sectors remain: Information technology, consumer discretionary, industrials and our contrarian pick, financials.

From a global perspective we remain overweight US equities while maintaining meaningful exposure to both developed and emerging markets on expectations that an economic recovery stateside coming out of the Covid-19 shutdown will help boost economic growth around the world and lead to a global economic recovery (similar to the one the world was experiencing just prior to the trade war between the US and China).