The primary theme of Q3 2020 remained squarely on the shoulders of how global economies reacted to the continuation of the global pandemic. By and large economies showed signs of improvement over Q2, in particular in the U.S. and China. This led many to believe the worst of the recession is behind us albeit challenges remain, particularly in labor markets, manufacturing and the travel and leisure industry which accounts for millions of jobs and a measurable percentage of GDP. Despite these challenges Q3 presented dramatic increases in higher risk assets and in our case the technology sector as a whole. As we outlined in last quarter’s newsletter ‘the Tactical Allocation Portfolio (TAP) embraced risk beginning in early April and ramped up exposure over the ensuing 6-8 weeks…’. This appetite for risk remained and as a result the model fared well over the previous 3 months. Outperforming all major averages with the exception of the NASDAQ 100 Index which witnessed a meteoric rise. And while our hope is that this appetite continues, no one can say for sure and many potential hurdles lie ahead.
As the number of new COVID-19 cases continues to hover around 40,000/day, near-term and furloughed workers are showing signs of becoming long term unemployed (or have left the workforce entirely). A presidential election looms and small businesses, a driving force behind economic activity, face potentially insurmountable challenges.
The domestic economy, in our opinion, is far from out of the woods. Again, we echo last quarter’s sentiment in that ‘our opinion remains that the recovery in equities in no way reflects the health of the overall economy’.
On the bright side of things monetary policy looks to remain accommodative for the foreseeable future. This policy initiative is meant to keep interest rates well below average in an effort to spur borrowing and subsequent spending. This coupled with additional stimulus either pre or post-election should serve as, at very least, a back stop to an economy searching for its long-term direction. As in the past we hesitate to speculate on what lies ahead but with almost certainty recent volatility we’ve witnessed following the initial run-up in equities will persist.
As outlined in our Weekly Market Updates TAP remains fully allocated to equities and is entrenched in a risk-on approach. The majority of positions have a nice buffer between current and potential exit pricing, meaning we are well positioned to mitigate risk during periods of near-term volatility, but also to react to anything more significant should things deteriorate quickly as was the case in March.
The fixed-income portion of the model stayed true to its commitment to the longer end of the yield curve although we are seeing signs of rising interest rates and a potential shift to a more conservative approach at the beginning on Q4.
And finally, we want to reiterate we are here to help anyone who finds themselves un or under-employed, unable to meet his or her monthly obligations, in need of an income/expense analysis or longer-term planning review. As we all continue to adapt our team is here at every step along the way.
From our families to yours,
Fraser, Dudley, Alex, Josh & Christie