September 2020 Market Insights
Equity markets have shown extreme resilience this year. Many are questioning whether markets have already hit their highs for 2020 and where are the best investment opportunities within equities between now and early 2021.
We are currently in an economic depression worse than the Great Depression of the 1920s and we are dealing with a global pandemic. Additionally, the US is experiencing social unrest and extreme political divisiveness. The backdrop is uncertain, but our outlook remains bullish on equities and economic growth in general. We have identified four primary factors that support our constructive outlook.
1. Massive support from the Federal Reserve has provided fuel for the markets’ resilience and now provides tailwind support for further market advances into 2021 and beyond. The Fed’s recent announcement to keep interest rates low for a prolonged period provides equity markets with additional tailwinds and makes the asset class an even more attractive home for capital.
2. US equities’ ability to survive the global shutdown highlights their ability to continue to do well as economies reopen and we (slowly) return to a more normalized way of life.
3. Because the world is facing a structural labor shortage it will rely further on technology to make up for the shortfall. This will lead to technology becoming an even larger share of global equities and the S&P 500. Furthermore, technology possesses stronger growth potential than most sectors, further enhancing potential equity returns.
4. Demographics influence economic activity and financial market outcomes. Millennials are the largest generation in the US and surpass Baby Boomers in size by nearly 40%. The following chart plots the DJIA and the year that each generation peaked in total size. Notice that every major market top coincided with a generational peak. Millennials are expected to peak in 2038, therefore, 2020 is likely the beginning of a new bull market that could last 20 years.
5. Bonus reason. Historically high levels of cash “on the sideline” which exceed levels last seen during the great financial crisis (2009). Over $4.5 trillion currently resides in institutional and retail money market accounts at record-low yields. Prior to COVID-19 those funds held $2.8 trillion. Therefore, there is potentially as much as $1.7 trillion of capital that could return to markets as investor confidence grows and investors grow weary of negative real (inflation-adjusted) returns on cash. That is an enormous opportunity. On a related note, we believe that the Fed’s recent announcement to keep rates lower for longer (13 of 17 governors projecting near-zero through 2023) make equities the most attractive asset class for new investment, further strengthening our opinion that equities will be the beneficiary when this excess cash is deployed for investment.
Going forward, we believe that great opportunities will be found in companies/industries that were hardest hit by the COVID-19 shutdowns. Industries such as restaurants, travel-related, amusement parks and real estate were among the most negatively impacted. While those have recovered somewhat, they possess the opportunity for outsized gains as cases retreat (as we are currently seeing) and/or when a safe and effective vaccine or treatment is discovered. Earlier this summer, we made tactical changes in our strategies that reflect our belief in this opportunity. We added exposure to a US large cap value manager, and we initiated exposure to a US equal weight consumer discretionary ETF. We countered these decisions by reducing exposure to a broad US large cap ETF. We have also increased allocations to US small cap equities. To date, these moves have provided additional returns for our clients.
We remain encouraged by the progress being made to identify antibody treatments as well as vaccines to combat COVID-19. While we cannot accurately predict when these discoveries will be made, our strategies are positioned to benefit from such an announcement.