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The bond complex advanced while global equities largely consolidated last week. Technology remains strong while the broader market continues to struggle.
The real economy is in a tough spot and difficult conditions are likely to continue. In the recent past, I used real economic conditions as a barometer for deploying cash. Given the equity markets’ strong moves higher, I asked the question of myself, “Is a continued defensive bias warranted”? In this environment, it is perhaps useful to ask the questions, “What could influence the equity markets to move higher from here?” and “What could influence the equity markets to move lower from here?” The following is a shot at answering these questions. Obviously the list is not exhaustive as there are an infinite number of factors that influence equity markets and the influencing factors may not have the predicted effect, but here goes with some of the bigger more likely factors.
Factors that could influence equity markets to move higher:
1. Continued liquidity injections by the Federal Reserve.
2. Interest rates being held steady by the Federal Reserve.
3. Additional fiscal stimulus by the President and Congress.
4. U.S. Dollar weakness.
5. Signs that COVID-19 infections are decreasing.
6. The deployment of a COVID-19 vaccine.
7. Continued strength in the technology sector.
Factors that could influence equity markets to move lower:
1. U.S. Dollar Strength
2. Acceleration of COVID-19 infections / deaths.
3. New, widespread lockdown orders.
4. Accelerating jobless claims.
5. Loss of momentum in technology stocks.
The two most concerning factors appear to be loss of momentum in technology stocks and accelerating jobless claims. Given the aforementioned factors, it appears as though equity markets are skewed towards gains verses losses. Unfortunately, given that the markets have come “so far so fast”, prices could be quite fragile. This is especially true if technology stock momentum / sentiment turns negative.
In answering my original question, “Is a continued defensive bias warranted?”, I believe that a continued defensive bias is warranted, however, factors beyond real economic conditions need to be given more weight in future analyses. Had I given factors outside the real economy more weight in the near past, it is possible positioning would have been more aggressive so as to take fuller advantage of recent equity gains. Still, the philosophy of avoiding losses is more appealing and I believe results in better performance over the long term verses chasing gains. At the end of the day, an appropriately balanced, relatively passive portfolio is hard to beat.
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Note: A code bug associated with the upgraded data feed caused inaccuracies in total return figures during June and July. This bug has been fixed.
Best
Cory Haupt
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