Quarterly Update

Tom Galvin, Chief Investment Officer | Jul. 2020

Where to from Here for Equities?

There will be two very important events in coming months. The CARES package will expire at the end of July, and Fed support programs at the end of September.

As for the election, we continue to believe it is too early to call the final outcome.

As the economy began to reopen in May, spending recovered and the savings cushion was lowered.

Earnings season so far has not been as bad as anticipated, with the majority of companies modestly beating reduced expectations.

While efforts are being fast-tracked, ultimate acceptance by society will hinge on how robust the process has been, and how safe people feel about getting the vaccine.

After the fastest and sharpest contraction in global economic activity since WWII, financial markets have rebounded sharply, driven by massive stimulus efforts, an easing of governmental lockdowns and progress in the fight against the coronavirus. With equity markets near all-time highs, we believe it is important to look at several critical investment variables that could exert significant influence on the economy and markets for the balance of the year. Broadly speaking, these critical investment variables relate to the government, consumer, corporations and COVID-19.

Government

There will be two very important events in coming months. The CARES package will expire at the end of July, and Fed support programs at the end of September. Headlines in the media will be filled in coming weeks covering what is likely to be a very contentious debate in Washington regarding the overall dollar amount of aid and specific programs. While we are assuming a package will be passed, the timeline is tight, and as we saw in late March, negotiations will likely go down to the wire.

We believe close to $2 trillion more in aid will likely be needed and should include elements to help the consumer, including extending unemployment benefits, though by a lesser amount, and another direct stimulus payment. Many smaller businesses also will need more support to stay open and remain viable for the long term. It’s very damaging for many small businesses to close, reopen and then shut down again. State and local governments, too, are facing increasingly large revenue shortfalls and will need funding to minimize layoffs. Finally, the dollar amounts to support the Fed programs also need to be extended. Whether tax cuts or more dollars will be allocated to support a more cohesive health care response remains to be seen.

As for the election, we continue to believe it is too early to call the final outcome. Democrats have the momentum currently and history shows that incumbents get voted out of office when the economy is not healthy. The proposals by the presumptive Democratic nominee, former Vice President Joe Biden, regarding tax increases do not seem like a wise move to us, given the current state of the economy, and would not be market-friendly. However, at this point, we suspect they may be more election rhetoric than policy reality.

Consumer

In the near term, consumer confidence and spending will be greatly influenced by the level of support in the next fiscal package. Benefits from the CARES package have undoubtedly bolstered consumer spending recently. One-time stimulus checks and the extra $600 in weekly unemployment benefits have effectively cushioned incomes amid widespread layoffs. In the month of April, it appears most of the benefits went into savings while spending fell. But, as the economy began to reopen in May, spending recovered and the savings cushion was lowered. It’s likely this trend continued in June.

Corporations

For businesses, the right fiscal programs for job retention and creation, as well as debt and rent forgiveness, could reduce the need for more layoffs. It is encouraging that the reduction in 2020 S&P 500 consensus earnings estimates has bottomed and gone sideways for a few months. Earnings season so far has not been as bad as anticipated, with the majority of companies modestly beating reduced expectations. It is early, and there will likely be some ugly results from industries most exposed to the crisis, but the second quarter will likely mark the trough for earnings.

Looking forward, we are expecting improvements in earnings over the second half of the year and into 2021. While the trajectory still has a wide range of outcomes that will be greatly influenced by the pace of economic activity, a solid fiscal package would be a good thing for confidence in the outlook. Currently, our estimate range for 2021 EPS growth remains quite large, at 20-40%, with a base case of 30%.

COVID-19

The battle to contain the virus, and the tension between public health and the health of the economy, will shape the trajectory of the recovery over the second half of the year. If true behavioral changes regarding wearing masks are occurring, this would make for a stronger and more effective response to the virus, should a second wave hit in the fall.

Positive trial results have raised hopes that a vaccine may soon be available, perhaps even by year-end. It is encouraging that COVID-19 is 80% similar to the SARS virus, and that its DNA has been decoded. The massive amount of money, science and brain power being devoted to developing a vaccine is also good reason to be optimistic. Still, it is premature to project that progress being made in Phase 1 and 2 trials will produce a vaccine that not only triggers a strong immune response, but is also long-lasting. While efforts are being fast-tracked, ultimate acceptance by society will hinge on how robust the process has been, and how safe people feel about getting the vaccine.

Cautious Optimism

Our conclusion is that economic activity in the second half of the year will continue to recover, but will be greatly influenced by these critical investment variables. Equity returns are likely to be moderate, with increased volatility as these variables unfold. We believe we have the right portfolio positioning, focused on high-quality durable assets that withstand uncertainty and minimize risk while also allowing for participation in future gains.

There will be two very important events in coming months. The CARES package will expire at the end of July, and Fed support programs at the end of September.

As for the election, we continue to believe it is too early to call the final outcome.

As the economy began to reopen in May, spending recovered and the savings cushion was lowered.

Earnings season so far has not been as bad as anticipated, with the majority of companies modestly beating reduced expectations.

While efforts are being fast-tracked, ultimate acceptance by society will hinge on how robust the process has been, and how safe people feel about getting the vaccine.

Stay Informed.

Get our Insight delivered straight to your inbox.

Important Disclosures

Any opinions, projections, forecasts, and forward-looking statements presented herein are valid as of the date of this document and are subject to change.

The information presented does not involve the rendering of personalized investment, financial, legal, or tax advice. This presentation is not an offer to buy or sell, or a solicitation of any offer to buy or sell any of the securities mentioned herein.

Certain statements contained herein may constitute projections, forecasts, and other forward-looking statements, which do not reflect actual results and are based primarily upon a hypothetical set of assumptions applied to certain historical financial information. Certain information has been provided by third-party sources and, although believed to be reliable, it has not been independently verified and its accuracy or completeness cannot be guaranteed.

Concentrating assets in a particular industry, sector of the economy, or markets may increase volatility because the investment will be more susceptible to the impact of market, economic, regulatory, and other factors affecting that industry or sector compared with a more broadly diversified asset allocation.

Private investments often engage in leveraging and other speculative investment practices that may increase the risk of investment loss, can be highly illiquid, are not required to provide periodic pricing or valuation information to investors, and may involve complex tax structures and delays in distributing important tax information.

Alternative investments are speculative, entail substantial risks, offer limited or no liquidity, and are not suitable for all investors. These investments have limited transparency to the funds’ investments and may involve leverage which magnifies both losses and gains, including the risk of loss of the entire investment. Alternative investments have varying and lengthy lockup provisions. Please see the Offering Memorandum for more complete information regarding the Fund’s investment objectives, risks, fees, and other expenses.

There are inherent risks with equity investing. These risks include, but are not limited to, stock market, manager, or investment style. Stock markets tend to move in cycles, with periods of rising prices and periods of falling prices. Investing in international markets carries risks such as currency fluctuation, regulatory risks, and economic and political instability. Emerging markets involve heightened risks related to the same factors, as well as increased volatility, lower trading volume, and less liquidity. Emerging markets can have greater custodial and operational risks and less developed legal and accounting systems than developed markets.

There are inherent risks with fixed-income investing. These risks may include interest rate, call, credit, market, inflation, government policy, liquidity, or junk bond. When interest rates rise, bond prices fall. This risk is heightened with investments in longer-duration fixed-income securities and during periods when prevailing interest rates are low or negative. The yields and market values of municipal securities may be more affected by changes in tax rates and policies than similar income-bearing taxable securities. Certain investors’ incomes may be subject to the Federal Alternative Minimum Tax (AMT), and taxable gains are also possible. Investments in below-investment-grade debt securities, which are usually called “high yield” or “junk bonds,” are typically in weaker financial health and such securities can be harder to value and sell, and their prices can be more volatile than more highly rated securities. While these securities generally have higher rates of interest, they also involve greater risk of default than do securities of a higher-quality rating.

All investing is subject to risk, including the possible loss of the money you invest. As with any investment strategy, there is no guarantee that investment objectives will be met and investors may lose money. Diversification does not ensure a profit or protect against a loss in a declining market. Past performance is no guarantee of future performance.

Indices are unmanaged and one cannot invest directly in an index. Index returns do not reflect a deduction for fees or expenses.

Alternative investments are speculative, entail substantial risks, offer limited or no liquidity and are not suitable for all investors. These investments have limited transparency to the funds’ investments and may involve leverage which magnifies both losses and gains, including the risk of loss of the entire investment. Alternative investments have varying, and lengthy lockup provisions.

Index Definitions

The Standard & Poor’s 500 Index (S&P 500) is a market capitalization-weighted index of 500 common stocks chosen for market size, liquidity, and industry group representation to represent U.S. equity performance.

Bloomberg Barclays Aggregate Bond Index is a broad-based flagship benchmark that measures the investment grade, US dollar-denominated, fixed-rate taxable bond market.

Bloomberg Barclays Municipal Bond Index is a market-value-weighted index for the long-term tax-exempt bond market. To be included in the index, bonds must have a minimum credit rating of Baa. They must have an outstanding par value of at least $7 million and be issued as part of a transaction of at least $75 million. The bonds must be fixed rate, have a dated-date after December 31, 1990, and must be at least 1 year from their maturity date.

Bloomberg Barclays Corporate Bond Index measures the investment grade, fixed-rate, taxable corporate bond market. It includes USD-denominated securities publicly issued by US and non-US industrial, utility and financial issuers.

Indices are unmanaged and one cannot invest directly in an index.

Put our insights to work for you.

If you have a client with more than $1 million in investable assets and want to find out about the benefits of our intelligently personalized portfolio management, speak with an investment consultant near you today.

If you’re a high-net-worth client who’s interested in adding an experienced investment manager to your financial team, learn more about working with us here.