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Eureka Wealth Solutions October 2020

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Quote Of The Month

I would transition away from the oil industry. The oil industry pollutes, significantly. ... It has to be replaced by renewable energy over time.”

-- President-elect Joe Biden

Economic Highlights

  • 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.

 

Market Highlights

  • 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.
 

Sector Update

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.


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Question of the Month

This is where we answer the best investment question we’ve heard all month. If you’d like your question to be considered, please send it to us.

Question

How should investors react in the aftermath of the US Elections?

Answer

With the elections finally behind us, so are seemingly the biggest risks.  A contested election would certainly continue the so-called ‘election drag’ on equities.  A blue wave sweep of the White House and both chambers of the Congress would bring the risk of the unknown actions by the perceived market-unfriendly government.  Finally, any kind of civil unrest before, during or after the elections is also not conducive to market gains.  Yet, any unforeseen news aside, we have emerged on the other side virtually unscathed.  At this point only a well-documented case of widespread election fraud could overturn the election results, and that seems highly unlikely, in our view.  The two run-off Senate elections in Georgia, however, could very well produce two more Democratic Senators, giving Democrats control over the Senate.  That scenario could change the politics and economics of at least the next two years significantly.

As things stand, the investments are undergoing two processes simultaneously.  On one hand, the risky assets are back on, as major election-related risks have subsided.  At the same time, due to high valuations of many technology investments, mixed earnings reports, and hopes of a working COVID-19 vaccine on the horizon, a significant rotation out of technology and into cyclical sectors like financials, materials, consumer discretionary and industrials is underway.  Volatility will remain elevated, but Santa Claus rally is looking increasingly likely.  Looking forward, the markets are beginning to price in Biden’s agenda including higher taxes and more regulations.  Traditional fossil-fuel energy sector is expected to be in the doghouse, while the renewables are likely to shine.

In terms of financial planning, Biden’s campaign pledge was to undo the Trump tax overhaul.  The key takeaway is that taxes are likely going up, one way or another, and will probably be retroactive starting 2021.  The estate tax exception is probably going back down to pre-Trump levels also.  What that means to Americans:

  • Take capital taxes in 2020 and delay capital losses to 2021
  • Use Qualified Opportunity Zones tax-sheltered investment in 2020 (it may go away by 2021)
  • Delay property tax payments until 2021
  • Delay charity contributions until 2021
  • Consider converting IRA to Roth in 2020
  • If you have small business, implement retirement plan in 2021
  • Talk to your estate planning professional in 2020

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The materials presented above serve informational purpose only and do not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities. The author, Eureka Wealth Solutions, LLC, and/or its clients may hold positions in the ETFs, and/or any investment assets mentioned above. Folio portfolios that may be presented are created by Eureka Wealth Solutions, LLC, and are available for purchase through Folio site.  Indices and trademarks are the property of their respective owners.  There are risks involved in investing including possible loss of principal.  Performance results of individual securities and portfolios are not indicative of overall client account performances. Past performance does not guarantee future results.
 
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