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Review the latest portfolio strategy commentary from Mike Gibbs, managing director of Equity Portfolio & Technical Strategy.

Short-Term Summary

Tomorrow marks 7 months since the March 23rd market low, and the S&P 500 is up a remarkable 53% since that day. Uncertainty remains high regarding the spread of the virus, additional fiscal aid, and the outcome of the election. However, we remain positive on equities over the next 6-12 months due to our expectation of positive news flow on vaccines and therapeutics, as well as additional fiscal stimulus post-election and unprecedented level of global monetary stimulus fueling the economic recovery in the year ahead. We are also encouraged by the underlying tone of the market.

While the S&P 500 has been in a normal consolidation phase (in our view) recently, market breadth has continued to improve beneath the surface. The US 10 year yield has been able to rise to 0.83%- it’s highest level since early June and above the upper-end of its several month range. There is technical resistance just overhead at 0.86% and the outcome of fiscal stimulus talks as well as vaccine data will be key catalysts to monitor, however this is supporting improvement in many of the cyclical areas of the market. For example, the Russell 2000 is on the cusp of new relative highs, and a break out would be another positive indication of market trends.

Q3 earnings season is underway (25% of S&P 500 companies have reported), and results have been well above consensus estimates. 88% of companies have beaten earnings estimates by an average of 18%, resulting in full Q3 earnings estimates being revised up 3.4% already (5-year average for the full quarter is 5.6%). These large upside surprises are even more impressive considering positive estimate trends heading into earnings season. However, the average price reaction has been muted at -1.0%- indicating to us that the bar was set high into results. The earnings results so far also show the massive dichotomy in fundamentals between companies. For example, 44% of companies that have reported grew earnings y/y this quarter by an average of 26%, while the other 56% in earnings contractions y/y saw earnings decline by an average of -51%!

For now, we would stick with areas operating best- favored sectors remain technology, communication services, health care, and consumer discretionary- while continuing to accumulate those with more leverage to the recovery- small caps, industrials, materials, and some consumer discretionary stocks. And would increase conviction on relative strength break outs. Globally, the emerging markets experienced a break out this week. Albeit overbought in the short term, we would continue adding to the region given our view of a lower US dollar and global economic recovery in the year ahead.

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Index Definitions

The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market.

The Dow Jones Industrial Average (DJIA) is a price-weighted average of 30 significant stocks traded on the New York Stock Exchange (NYSE) and the NASDAQ.

The NASDAQ Composite is a stock market index of the common stocks and similar securities listed on the NASDAQ stock market.

The MSCI World All Cap Index captures large, mid, small and micro-cap representation across 23 Developed Markets (DM) countries. With 11,732 constituents, the index is comprehensive, covering approximately 99% of the free float-adjusted market capitalization in each country.

MSCI EAFE (Europe, Australasia, and Far East) is a free float-adjusted market capitalization index that is designed to measure developed market equity performance, excluding the United States & Canada. The EAFE consists of the country indices of 21 developed nations.

MSCI Emerging Markets Index is designed to measure equity market performance in 23 emerging market countries. The index’s three largest industries are materials, energy, and banks.

Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor’s results will vary. Past performance does not guarantee future results. Future investment performance cannot be guaranteed, investment yields will fluctuate with market conditions.

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