- The COVID-19 second wave is producing record number of cases and deaths across the country and abroad, causing new local restrictions. The vaccine developments are encouraging, however.
- The US Election resulted in Joe Biden as the President-elect and a split Congress, although some uncertainties remain.
- Q3 GDP had a huge rebound, up 33.1%, after the shutdown affected Q2 number.
- Payroll employment, consumer spending and home sales all slowed the pace but remained growing.
- The COVID-19 second stimulus package appears stuck in the Congress.
- US Equities had another volatile month in October, as expected, and S&P 500 Index closed lower by -2.7%.
- Foreign equities diverged, with Developed Markets down by -4.0%, and Emerging Markets outperforming other asset classes, up 2.1%, and finally positive on the year.
- US high-grade bonds lost -0.5%, while high yield added 0.3%, and foreign bonds also remained in a small range, with only Emerging Markets closing on the upside, 1.4%.
- Commodities edged up 1.4%, despite oil being down -5.7%, and even gold gave up -4.2%.
- US Dollar was the best-performing major asset class this time in the risk-off month, up 1.9%.
Observations and Expectations
October remained volatile all through the earnings season and leading up to the Elections. Most asset managers have approached it with an abundance of caution, fearing multiple risk-off scenarios. With the seemingly successful resolution of those risks, the market is looking to push higher, although the sector rotation is clearly in the works. More on this in or Question of the Month.
Looking forward to November, we’re focusing our attention on the finalizing the Election results, latest round of (mostly) tech earnings and possible movement on the stimulus package before the end of the year. Any of the positive outcomes here should give an extra boost to equities. The pandemic’s second wave is alarming, but good news about vaccine trials and continuing progress in rapid testing technology give rise to hopes of economic recovery.
We’re continuing to look for many market dislocations to take advantage of, while still eyeing the fat-tail risk scenarios. We see some opportunities in rotation to financials and industrials, as well as certain new issues coming to the market now, especially via SPACs. Emerging Markets and especially China also offer better risk/reward opportunity now with the weak dollar. Passive bond indices, on the other hand, are looking risky, both in the corporate and municipal worlds. Gold remains the best hedge against political turmoil and inflation.
Technology has rarely been in this category. The digitalization process, sped up by the pandemic, propelled my industries within Technology sector to new highs. However, the valuation in some places have reached unsustainable levels, given the eventual slowdown in growth. Cyclical rotation has begun, and many names in this space are entering correction territory, although the sector will likely come back strong again.
Financials have been hit hard in the pandemic. Part of it was a knee-jerk reaction of the retail investors stemming from the muscle memory of the 2008 Financial Crisis. While the circumstances are clearly different, the threat of the deteriorating health of the banks’ underlying loan portfolios, including business loans, mortgages, auto and student loans, remained very real. The Congress – with the stimulus package – and the Fed – with the extraordinary liquidity measures – have shored us much needed confidence. The progress in the COVID-19 vaccine may just be enough to push the sector into the green again.
Impact Investing has gotten another lift from the apparent Biden victory. Alternative energy and electric vehicle industries have pushed to the new highs and perhaps got ahead of themselves. While some consolidation is underway, this is a healthy market reaction, and the long-term trend remains very bullish.