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Strategic Insights

Volume 9, Edition 33 | October 12 - October 16, 2020

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Following the Evidence

Doug_Walters Doug Walters | Articles

Read Time: 3:00 min

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These days, investor uncertainty is tangible. While we do not always feel it, uncertainty is there, in good times and bad. A focus on evidence and not emotion is the best way to navigate whatever the future may bring.

Contributed by Doug Walters , Max Berkovich , Aleksey Marchenko

Stocks in the U.S. were up modestly this week, as investor sentiment wrestles with Congress’s inability to agree on the next leg of fiscal stimulus, rising COVID cases in the U.S. and Europe, and a fast-approaching, contentious election. As we discussed in our webinar last week, all of these sources of angst are leading to a high sense of uncertainty amongst investors. Yet uncertainty is always high. Take this year, for example. Did uncertainty feel as high in January? For most, the answer is an unequivocal “no.” Yet two months later, the economy was crippled by a pandemic, and 20 million U.S. workers had lost their jobs. Uncertainty in January was VERY high, as it always is; we just did not feel it then as tangibly as we do today.

As a pragmatic, evidence-based investor, the only logical approach is to accept and embrace the inevitable uncertainty. You can not predict the future, but you can prepare for it. Do not focus on what you “think.” Focus on what you “know.” How do we do that?

Diversified Portfolios

Not just stocks and bonds, but a healthy allocation to Small-Cap, International, Emerging, and Gold can improve risk-adjusted returns. Small-Cap has significantly underperformed Large-Cap, so now would appear to be a good time to get that allocation if you do not already have it.

Factors at the Core

We bias our equity positions toward factors that have historically benefited portfolio returns: High Quality, Good Value, High Momentum, and Small Size. Like Small-Cap, Value has lagged, and we would recommend ensuring Value is well-represented in your portfolio.

Systematic Rebalancing

The act of periodically bringing your portfolio back in line with your long-term allocation is just the beginning. We practice dynamic rebalancing. We allow allocation to drift within fairly wide corridors but check regularly for a corridor breach. Evidence shows that this approach helps to maximize long-term returns. When you have a well-constructed approach to rebalancing, market volatility is simply an excellent opportunity to sell high and buy low.

So are we living in uncertain times for investors? Of course! When it comes to investing, we are always living in uncertain times. An approach focused on evidence and not emotion is the best way to navigate whatever the future has in store.

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Headlines This Week

Still No Deal

While Secretary of the Treasury Mnuchin continues to negotiate with House Speaker Pelosi on the next stimulus package, an agreement is far from fruition.

  • The President has been quoted on Twitter as saying, “Stimulus! Go Big or go Home!!!”
  • The President seems to be at $1.8 Trillion, and the House is at $2.2 Trillion.
  • However, throwing another wrinkle into the negotiations, Senate Majority leader McConnell called for targeted relief for American workers and indicated the Senate is unwilling to spend trillions of dollars to help buoy the economy.
  • Weekly initial jobless claims coming in higher than anticipated at 898,000 and continuing claims of over 10 Million should ring some alarms for action.

Going Viral

Cases of the virus continue to surge in Europe, with Germany, Italy, and the Czech Republic reporting record infections.

  • France is imposing a 9 P.M. to 6 A.M. curfew for Paris and other big cities.
  • In the U.K., London will move to “Tier 2” restrictions Saturday, barring the mixing of households indoors.
  • Europe continues to try to avoid another lockdown for now.

Injecting Some Vaccine News

Vaccine studies from Eli Lilly and Johnson & Johnson were paused this past week.

  • Johnson & Johnson’s pause is due to an unexplained illness in a study participant joining AstraZeneca’s study that is still halted in the U.S.
  • No word on why Eli Lilly’s study was halted by the Data and Safety Monitoring Board.

Banking on Earnings

Market pundits have been anticipating a V-Shaped recover in earnings for the 3rd quarter. While it is too early in the earnings season to judge, the first week was full of bank results and a few bellwethers in health care.

  • With interest rates offering little help, the big banks beat expectations thanks to fee income.
  • A side note: The 30 year fixed rate mortgage hit yet a new low at 2.81% this week.

The Week Ahead

Final Debate

Thursday’s Presidential Debate at Belmont University in Nashville, Tennessee, is the biggest headline maker next week.

  • NBC News’s White House correspondent and co-host of Weekend Today Kristen Welker will be the moderator and will choose the topics.

A Sleeping Giant Awakes

China will Report it’s 3rd Quarter Gross Domestic Product (GDP) on Monday.

  • Economists predict the Chinese economy expanded by 5.2% year-over-year, faster than the 3.2% it expanded in the 2nd quarter.
  • Such growth in the quarter will put the economy back to a pre-virus growth level thanks to strong industrial production.
  • Chinese consumer spending has lagged in the comeback so far as the stimulus programs have targeted businesses.
  • The International Monetary Fund forecasts a 1.9% growth for the Chinese economy for 2020, making it the only major economy expected to grow this year.

Also to Keep an Eye On

  • The Beige Book, the Federal Reserve’s report on the current economy, will be released Thursday.
  • The weekly jobless claims and continuing claims provide a pulse on the employment situation.

About Strategic

Founded in 1979, Strategic is a leading investment and wealth management firm managing and advising on client assets over $1.3 billion.

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