Market Strategy 7/27/2020

Key Takeaways

• All eyes this week will be on economic data and earnings results and to what degree they reflect the impact of the resurgence of the virus that causes the Covid-19 illness in the process of reopening the economy.
• Investors will look for as much guidance as they can get from management calls this week. A dearth of guidance in Q1 and in Q2 has placed unprecedented pressure on the analytic community in projecting future revenues and earnings.
• We expect the Federal Reserve in its FOMC meeting this week to reiterate its sensitivity for the economic uncertainty caused by Covid-19. 

Another busy week lies ahead for traders and investors with 192 companies in the S&P 500 index scheduled to report results this second-quarter earnings season. With just 26% of companies having reported it’s too soon to call the game, but so far things have been trending somewhat better than consensus analytics was expecting at the start of earnings season. There have been enough winners to help offset losers in the earnings season through last Friday to keep investors of both bullish and bearish persuasion on their toes.

A raft of economic stateside data ranging from durable goods orders to home sales, mortgage applications, consumer confidence, retail data, initial jobless claims and more will provide a steady stream of data to be parsed. The effects of the Covid -19 resurgence on economic activity will be of key interest to investors this week.

Mid-week is the Fed’s FOMC meeting with the decision scheduled for release at 2pm on Wednesday followed by comments from the Fed Chair. The market will be looking for any change in tone in the Fed’s statement. We’re not expecting anything that would shock the market but rather check for signs of continued commitment to the Fed’s mandate and likely a reiteration of their acknowledgement that uncertainty tied to Covid-19 remains entrenched in their outlook for now.

Last week saw the NASDAQ Composite slip for a second week straight on mixed earnings results among technology names that reported and news that a multigenerational bellwether technology company is giving serious consideration to outsourcing its core line of business (chip production). That notwithstanding it should come as no surprise that after making substantial gains and leading the markets higher so far this year technology stocks may be due for a haircut while other sectors get a chance to garner investors’ attention.

Last Friday the NASDAQ closed down 1.33% on the week after closing at another record high on Monday. Any further give back of tech and tech-related stocks near-term should be taken in context of the NASDAQ’s 15.5% gain in price from the start of the year as well as its 51.05% exponential run-up from the March 23rd low of this year. In our view tech stocks could take a rest for a spell before they take to the higher ground again. The secular trends that provide their appeal for investors remain in place even if valuations among some of tech’s leaders are somewhat stretched near term.

In our view comparisons of today’s technology bull run with the tech bubble of the late 1990s lacks consideration of the structural elements of technology today as well as how deeply embedded tech is in the lives of both businesses and the consumer. Affordability and easy access to technology will likely underpin tech’s overall outperformance for longer this cycle than in past cycles.

In the past week along with legitimate concerns about the recent resurgences of Covid-19 stateside and abroad there was also a resurgence of the “life will never be the same” kind of worry creeping into the theme du jour. We don’t attribute much value to the latter worry as collaborative efforts by scientists across the globe continue at record pace to pursue vaccines to stem the spread of the virus as well as drugs of greater efficacy to treat those who have fallen ill to it.

The initial re-openings stateside and elsewhere around the world clearly have revealed that folks of all ages and backgrounds want to get out of their domiciles, get the kids back in school, dine out, socialize and shop. We view it best to consider the reopening setbacks as just that and not something that is permanent. It may take some time before commercial aircraft and sports stadiums are filled with passengers and fans but we doubt that the disruption of life as we knew it is permanent. Patience, effort and responsible behavior along with innovation and science should be able to restore society to normalcy if just somewhat altered by our experience.

We’re looking for the politicians in Washington to recognize the need for an extension of the economic rescue efforts before serious damage is done to the economy. Fortunately it’s a big election year and constituencies of both parties will be prone to keep score regarding politicians’ efforts on their behalf. Such an environment is likely to lead to compromise sooner rather than later.

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 with 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 expansion (similar to the one the world was experiencing just prior to the trade war between the US and China).