Review
During the 3rd quarter, we continued to see equity markets rise and hit new highs. Accommodative monetary rhetoric from world policymakers created a backstop for the market and provided assurance that interest rates will remain low for years to come.
Outlook
We expect a volatile fourth quarter as the US Presidential election and spike in worldwide Covid-19 cases grab the headlines.
Volatility surrounding Covid-19 will center around both resurgence as we get into flu season and headway made on potential drug preventatives and treatments. If major world economies face lockdowns again, it could adversely impact equity markets.
As far as the US election, if President Trump wins re-election, equity markets should hold or excel. A re-election should ensure the tax policies the current administration put in place will remain for at least another four years. The pro-growth positioning is a benefit to both corporate earnings and personal spending and would likely reflect positively on the economy and stock prices.
A Biden administration may not be as drastic to the equity markets as feared. Joe Biden has promised during his campaign that he would instantly look to increase corporate tax rates. Increasing corporate tax rates would result in a lowering of corporate profits and promote a decline in stock prices. However, in my opinion, it would be difficult in the current economic environment to follow through with any significant tax policy change. If he were to do so, the change could force corporations to lay off (more) workers and shatter the current fragile economy. The result would likely lead to a recession. The more probable outcome is minor policy changes and the absence of any major tax overhauls for a few years or at least until the US has returned to pre-Covid conditions.
Equities
The US continues to outperform international and growth has dominated value. We feel that trend is likely to continue but might see the margin start to decrease. Expectations are that US equities will be volatile leading up to and possibly past the election. However, with monetary policy continuing to be accommodative, we would be looking to increase equity exposure on weakness and not sell in expectation of it.
Fixed Income
It is a difficult period for bonds as interest rates continue to hover around historic lows. Fixed income seekers can get drastically more income from dividend paying stocks vs almost any fixed income product. This is another reason we continue to believe equity markets will continue to outperform. However, from an overall portfolio allocation standpoint, we always believe in having an allocation to this sector. Our current position is underweight.
Alternatives
At the beginning of the crisis, we took a small position in gold across our models for protection. As the world starts to normalize, we will look to exit this position and reallocate to undervalued areas.
As always, I stress that in this ever-changing political and economic environment, sensible diversification is the key to weathering any market uncertainties.
Jason M. Vavra, CPA, PFS
Email: jvavra@vcm-wealth.com Website: www.vcm-wealth.com Twitter: @VavCap
Disclaimer
The information contained herein is not considered an offer to buy or sell any securities referred to herein. Opinions expressed are subject to change without notice and do not take into account the particular investment objectives, financial situation, or needs of individual investors. There is no guarantee that the figures or opinions forecasted in this report will be realized or achieved. Past performance is no guarantee of future results.
