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U.S. equities moved sharply higher last week while longer duration bonds retreated and shorter duration bonds largely consolidated. Global equities were mixed. The “Risk On” trade appeared to be live and well given last week’s price action.
On the COVID-19 front, it is instructive to look at the rt.live site and compare the “3 months ago”, “2 months ago”, and “Latest” pages along with Rt for what were previously “hot spot” states. The data have improved significantly. Another interesting set of data is the CDC data on excess deaths associated with COVID-19. It appears that the U.S. is nearly back to the normal expected number of deaths without COVID-19 present. The obvious questions is, with states still reporting deaths from COVID-19, how can excess deaths be back to normal? A possible answer is, that although deaths from COVID-19 continue, the reduction in deaths from other causes due to behavioral changes combined with COVID-19 yields a “normal” number of expected deaths. The data also appear to show that the “second wave” of COVID-19 related deaths was nowhere near as bad as the first wave and that the numbers continue to improve. The big picture takeaway is that we could be very close to rapid improvement in the number of deaths associated with COVID-19. The wild card is the back to school season. There could be some lumpiness in the observed data over the next several weeks if cases rise as kids head back to school. Even given possible lumpiness in the data, the distribution of deaths appears to be roughly a normal distribution and it seems unlikely lumpiness will change the nature of the distribution. If deaths associated with COVID-19 decline in the coming weeks this would likely be positive for equity prices. Here is the link to the CDC data: https://www.cdc.gov/nchs/nvss/vsrr/covid19/excess_deaths.htm#dashboard
Although recovery in the real economy appears to be continuing, it also appears to be slowing. Given recent price action, market participants seem to believe that the Federal Reserve and Congress have their backs and that any weakness will be met with easy monetary policy and fiscal stimulus. Any signs to the contrary could easily cause a correction in both equities and bonds.
It seems that few would disagree that equities are expensive at this point. The tech sector especially so. Unfortunately or perhaps fortunately for those already invested, valuations can remain stretched for extended periods. Bubbles can be blown and remain inflated for some time. Recent sharp gains, however, can breed “fragility”, meaning prices could easily correct significantly and swiftly with little warning. One of the best tools a long term investor can use in controlling risk under such a scenario or virtually any scenario for that matter, is portfolio rebalancing. This is especially true during periods when equities and bonds have moved significantly in opposite directions. Now would not be a bad time to examine portfolio risk and determine whether rebalancing is warranted.
Bookmark this COVID-19 site. https://rt.live
Best
Cory Haupt
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