Nearly five months ago, in mid-March, we shared our views on navigating the investment implications of the COVID-19 pandemic in a piece titled The Road Ahead. At the time, New York City was becoming the global virus epicenter and its health system was struggling to cope. Concurrently, global economic activity ground to a halt as business closures and shelter-in-place orders were enacted in much of the developed world. Unsurprisingly, extreme health policy responses and future uncertainty led to one of the sharpest declines in risk assets in history, as the S&P 500 index dropping more than 30% in about a month’s time.
The Road Ahead was intended as a plan for our clients to weather the storm, regardless of how long it lasted. Our advice was to focus on three themes in portfolios: Liquidity, Quality, and Opportunity.
Liquidity – to minimize the likelihood of selling assets at inopportune times to fund near-term needs
Quality – to tilt toward companies with strong balance sheets, positive cash flows, and good market positions because they were well-suited to deal with economic uncertainty and ultimately emerge stronger
Opportunity – to take advantage of opportunities that often arise during significant drawdowns to purchase industry-leading companies at steeply reduced prices and to identify future leaders
Much has happened since mid-March, including unprecedented fiscal and monetary stimulus across the world, and we’ve touched on those topics in subsequent commentary. More recently, we’ve described the current state of the market as the “Haves and Have-Nots”; mega-cap technology and e-commerce leaders flourish as brick-and-mortar stores, airlines, hotels, and restaurants struggle to survive.
If five months seems like an eternity ago to you, you’re not alone. As such, we thought it was a good time to reassess the current state of affairs and revisit The Road Ahead.
COVID-19 and Vaccine Update
While many countries first affected by COVID-19 seem to have contained the virus at present, many other regions continue to be affected by outbreaks. For example, the US has experienced a decline in cases in the Northeast, but new hotspots subsequently emerged in sunbelt states like Florida, Arizona and California. As illustrated below, daily reported cases in the US are significantly higher now than they were in the spring.
While more recent outbreaks have not completely overwhelmed healthcare systems as they did in New York earlier this year, the growing case numbers raise questions regarding whether sending kids back to school, traveling for work, and holding sporting events before there is a vaccine makes sense. If the answer is no, it will be difficult for the global economy to fully recover.
There are reasons for optimism, however, as a number of companies have recently announced vaccine developments that are quite promising (see summary below). Some companies have gone the conventional vaccine route of introducing a dead or weakened virus, while others focus on novel mRNA vaccines. While it’s impossible to predict the vaccine timeline with certainty, we believe there is a real possibility that one or more of these vaccines becomes approved as soon as late-2020 or early-2021.
Source: Perspectives on Coronavirus (Part 5), Eventide Asset Management, LLC
Presidential Election and Markets
As we move past the initial COVID-19 market uncertainty and the path to a vaccination approval appears more likely in the not-so-distant future, market volatility has declined and investor focus has begun to shift towards the election in November. We are often asked about what impact the election will have on markets. It is impossible to model all of the potential outcomes with any precision, however, we believe the discussion is more nuanced and less binary than it may first appear.
Consider the following:
Exhibit 1 – Levels to Gain Control of Each Branch vs. Current or Prior Levels
Exhibit 2 – Average Historical S&P 500 Total Returns by
Control of White House & Congress
With more than two months until the presidential election, much can change in the race for the Oval Office. This is especially true in 2020 as the country, and the world, wrestle with COVID-19. Although the outcome of the race remains highly uncertain, we do not believe that the result of the presidential election alone will signal either feast or famine for the stock market for the following four years.
Potential Portfolio Implications
The global pandemic has dominated news headlines the past few months and for good reason. It has negatively impacted life in many ways, including taking its toll on the economy and markets. However, it is important to remember that not all parts of the market have been impacted the same. In fact, the S&P 500 index is very near all-time highs as some mega-cap companies that dominate the index have seen their stock prices soar.
For example, the top five largest companies in the S&P 500 (Microsoft, Apple, Amazon, Alphabet, and Facebook) now represent more than 20 percent of the index (see below).
At OneAscent, we continue to recommend that clients place an emphasis on high-quality companies in equity portfolios. There is still uncertainty regarding COVID-19, the timetable for a vaccination approval, and how quickly vaccines can be distributed to the masses. In addition, geopolitical issues like the trade war with China and the oil price war led by Russia and Saudi Arabia have the potential resurface and escalate at any time.
In addition, we are also beginning to spend more time actively looking for opportunities in parts of the market that have not materially participated in the rally thus far. We believe that there are companies and industries in the “Have-Nots” group that represent great investment opportunities, especially if vaccine development is closer to the “best-case” scenario. We believe that the key for asset allocators, as always, will be to research these opportunities fully and to allocate risk budgets wisely.
As always, we appreciate the opportunity to partner with you. We welcome any questions you may have as we navigate markets and the various challenges and opportunities they present together.
 Source: Morningstar
Past performance may not be representative of future results. All investments are subject to loss. Forecasts regarding the market or economy are subject to a wide range of possible outcomes. The views presented in this market update may prove to be inaccurate for a variety of factors. These views are as of the date listed above and are subject to change based on changes in fundamental economic or market-related data. Please contact your Financial Advisor in order to complete an updated risk assessment to ensure that your investment allocation is appropriate.