With over half the year behind us we thought this would provide a reasonable opportunity to take “stock”, if you will, of the investment landscape. Our aim is to take a snapshot of where we are currently in terms of global markets and economic data year-to-date (YTD), as well as of various market sectors.
It has been four months since many of our employers have ordered us home, with very few having actually returning to the office since then. We incorrectly thought that by now the biggest threat of the pandemic would be in the rear-view mirror and election rhetoric in full swing. A back to normal / business as usual type of feel. Instead, Corona Virus cases were hitting new highs in July and State officials began suing each other over safety protocols. If we needed another sign that it is definitely “not” normal or business as usual, both the Republican and Democratic parties are faced with the fact that their national conventions won’t look anything like what they are used to. Both parties are looking at some type of virtual event along with some possible virtual presidential debates to follow.
Politics aside, the Corona Virus has taken its toll. The economy has clearly suffered. The initial reading for second quarter GDP growth (reported as an annualized number) came in at a mind blowing -32.9%. The GDP decline for the quarter itself was roughly -9.5%. Combined with the first quarter decline, GDP has fallen 10.6% so far this year.
While the Federal Reserve and both Houses of Congress have been able to provide economic relief with the Main Street lending program and the CARES Act respectively, there is a widespread belief that more is still needed. Congress is referring to its next support package as “Phase 4”, which we believe will focus on extending enhanced unemployment benefits as well as on providing aid to state and local governments. As of the end of June, the unemployment rate was 11%, and weekly unemployment claims have been around 1 million per week since then. The $600 addition to unemployment benefits provided by the CARES Act ran out at the end of July, and its continuation is in doubt, just as Congress is about to leave for extended leave next week. We expect a temporary measure extending additional benefits to be put in place if no agreement is reached before the Congressional break.
Both monetary (Federal Reserve) and fiscal (Congress) policies have been the main drivers of the stock market performance or more specifically, the speed of the market’s recovery. This support has helped second quarter earnings results exceed expectations, which continues to give equity markets confidence. As of Aug 4, the S&P 500 Index is back to being positive for the year, up about 2.3%. Many investors have been pointing out the divergence between current stock market valuations and what companies are estimating for future earnings. It reflects investors expectation for continued monetary support, more Congressional support, and that a sure-fire treatment or a vaccine will be announced sooner than later.
As for Stone Bridge, we have been very active in many clients’ portfolios over this time period. In addition to what we have reported in past Notes (overweighting gold, technology, consumer discretionary, energy, consumer staples and biotechnology, as well as increasing cash), our volatility algorithm, Varitex, and our Emerging Market strategy—which gave us signals to increase our cash/bond exposures in February—have more recently gotten us back into US stocks and emerging market stocks, respectively. Below is a ranking of select global indices and asset classes based on their year-to-date performances (listed from best to worst, as of Aug 4):
Positive YTD (Aug 4) Negative YTD (Aug 4)
Gold Emerging Market Equities
US Treasury Bonds (20+ year) Real Estate
Technology Developed Int’l Equities
Consumer Discretionary Energy
S&P 500 (+2.3%)
As an observation, there has been increased attention paid to investing according to environmental, social, and governance guidelines, otherwise know ESG investing, from large institutional investors. The pandemic, combined with recent social unrest, has prompted many investors to “take stock” and compare their investment approach to their personal values and has led to speculation that future government initiatives might be tied to ESG targets.
Hopefully everyone has been receiving our invitations to our virtual events. If not let us know. We have had some very informative discussion around healthcare, biotech and the virus. In recent months we have added exposure to gold, gold miners and to the afore mentioned biotech. And most recently our volatility algorithm has given us a signal that has us constructive on near term equity market performance.
Please reach out to us if you have any questions or concerns. And be on the lookout for upcoming live web events. We certainly hope the remainder of the summer finds you safe and well.