Review the latest portfolio strategy commentary from Mike Gibbs, managing director of Equity Portfolio & Technical Strategy.
A much better than expected Q2 earnings season, along with a reduction in nationwide COVID-19 hospitalizations, supported the S&P 500 drifting to its highest level since the February selloff began– just 2% from new all-time highs! While the 49% S&P 500 rally since March 23rd has been remarkable, market performance continues to be bifurcated with outperformance generally dominated by the large cap, technology-oriented stocks. Their strength is masking the weakness still felt by many other areas, and that fundamental gap between the winners and losers of this environment are having a dramatic impact on style returns, cap size returns, and asset allocations. For example, while the S&P 500 is just 2% from new highs, 40% of its stocks are still down over 20% from their highs.
Q2 earnings season has been far better than expected. But once it ends in the next week or so, investors may quickly shift their attention toward the election with Presidential candidate Joe Biden expected to announce his running mate next week (less than 90 days until election day). Historically, market performance in the three months leading up to the election has been a good predictor of the Presidential party outcome. For example, if the market is positive, the incumbent party typically wins; while if the market is negative, there is typically a change in party. This has occurred with an 83% win rate since 1928 and 100% of the time since 1980 (correctly predicting the last 9 elections). This could also be self-fulfilling in a way as market performance could be more cautious and volatile in the lead up to election day when a change in party is a higher likelihood (as it is now) due to increased uncertainty. We would not be surprised to see this trend play out in the coming months.
Over the longer term, we view the unprecedented amount of stimulus globally as supportive to the economic recovery. Record low interest rates also support elevated valuation multiples and make equities relatively attractive vs. alternative asset classes in our view. We are also encouraged by momentum in the S&P 500’s fundamental recovery, as well as medical data surrounding COVID-19 therapeutics and a potential vaccine. We believe these positives outweigh the potential negatives, and would thus use weakness as a buying opportunity. But in the short term, we would not be surprised to see volatility pick up and the market grind (within an overall uptrend) to continue with sector swings beneath the surface. With that in mind, we would stick with the areas performing best through this current environment for now- Technology, Health Care, Communication Services, and Consumer Discretionary (due to e-commerce and stimulus supporting the consumer).
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