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

Short-Term Summary

Equity markets have pulled back 7.5% in recent weeks as the virus spread has intensified. New cases, hospitalizations, and 7-day average deaths are all trending higher, as is the positivity rate of new tests (7.4% currently). This is leading to concerns around the eventual reopening timeline, as well as enhanced mitigation measures. Moreover, the Congressional impasse on additional fiscal aid continues as both sides remain in gridlock until after the election- which also creates uncertainty regarding its outcome and implications.

Ultimately, we believe additional fiscal aid will come post-election, positive news flow on therapeutics and potential vaccines are likely to continue, and the Fed still remains on hand to support the economic recovery. Additionally, we continue to view the S&P 500 as in a good intermediate term uptrend and in the early stages of a bull market. Because of this, we believe the pullback should be used as a buying opportunity, while acknowledging the potential for continued volatile trading in the short term. The risk/reward to our base case 2021 S&P 500 target (3600) has also become more attractive at current prices, representing 10% potential upside (with an upward bias to that level).

Technically, we believe the highest odds are for support to be found near the 200 day moving average. We see the first level of good support at ~3200 (horizontal support that held in September pullback), followed by 3130 (200 DMA), and 3000 (horizontal support). This represents -2% to -9% additional downside from current levels with a bias to favor the smaller decline. Technical indicators are approaching levels enough oversold to have a bounce; but with the election next week, we expect stocks to stay on the defensive. The weakness does set the market up for a counter bounce after the election (in the absence of a contested outcome).

On the earnings front, Q3 results have so far come  in  well  above  expectations  in  aggregate,  leading  to  a  7.2% increase in full quarter estimates. This is above the 5 year average revision, however earnings season is impressively only half way through. The results also highlight how bifurcated fundamentals are this year with about half of companies growing and the other half contracting y/y. The group growing is doing so at a healthy 22.2% median rate, while the group contracting is doing so at a depressed -19.1% median rate. Price reactions (to earnings announcements) have been muted (-0.8% median), as the strong overall reports have not been rewarded by investors. This suggests that much of the growth was baked into expectations, but also likely has more to do with results coming in the midst of a ramp up in virus spread concerns.

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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.

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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.

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