The 2nd surge of COVID infections is gaining momentum across many countries with US continuing to lead in number of cases and deaths. President Trump's COVID and outbreak at white house in last two weeks demonstrated that even highest and most secure facility in world could not prevent COVID penetration..the blame goes to administration for not taking precautions (the way they would take against terrorist threats). It feels that our own personal house is more safer than White house.
Markets had their best week since July when similar summer surge was happening and it continued to make highs till end of Aug. It a way markets are delinking from COVID story. We are at similar juncture and 4 factors would matter most for future direction.
Economy:
Q3 economy should show ~25% growth compared to Q2 (when it went down by 30+ % due to sudden lockdowns in March). That would be highest growth ever recorded for US economy. Over weekend, I visited St. Pedro's Square in San Jose Downtown for a quick pizza night. And the place was packed with outdoor dining - people enjoying dinner while watching game 5 of NBA finals all while maintaining social distancing and masks. That means people are tired of sitting at home and having quiet dinners on Friday evenings. They want to get out, spend their savings and enjoy a nice evening out. Its good sign for economy as long as precautions are taken to avoid covid surge. Expect Q3 economic bump to continue in Q4 and into 2021. Stimulus talks are going back and forth and eventually both parties would agree to $2 Trillion stimulus which is desperately needed to keep the steady progress on economic front.
Employment:
The dreaded double digit un-employment is over. With latest readings, US is on its way to recover to full employment (generally considered when unemployments falls below 4%) in about 2 years (currently it's at 7.5%). While it's good sign, there are still millions of people un-employed or have stopped looking for work. In absence of stimulus bill, airlines and many businesses in travel, retail, hotel industry would have to go thru another round of layoffs to survive. But politicians would come together after elections and pass the bill no matter the results of elections. Steady progress but more is needed
Earnings:
If there is one E which is doing extremely well, its corporate earnings. Q3 earnings cycle will start next week and by all indications it would be repeat of Q2. Expectations would be beat by majority of companies due to lower expectations. WFH companies (SAAS companies, online retail etc) would continue to do very well. Even economically sensitive companies (energy, financials) would start showing some green shoots. The earnings would benefit due to generally lower costs of operations and no impact on productivity. With over $10 Trillion worldwide stimulus, businesses are able to minimize impact on topline.
Elections:
While more October surprises could come, markets are realizing that Biden win is over 85% secured. Trump has very small chance of winning 2nd term. In fact I won't be surprised if Biden ends up with decisive win with over 300 electoral votes. That would remove post-election chaos. Markets would love to have divided government with GOP holding slim margin in senate but won't mind blue wave similar to 2008 elections. Democrats controlling all three branches mean more stimulus which in short term would be good for economy. So "contested election" risk had gone down significantly. People are so tired of 2020 that they just want to feel normal and Biden as president feels normal. So this time vote would be not for Biden but for "return to normal".
With this backdrop of 4Es, how should one position? Here is one suggestion. Invest in "ETF" ETFs
ETF - Energy (XLE: $30.60), Technology (XLK: $122), Financials (XLF: $25.25)
One can decide to split the investment equally or go for 30:40:30 or 25:50:25 depending on one's risk/reward profile. Energy and Financials are down significantly and trading at historic discounts to S&P (SPY) but could recover in 2021 when things become normal. Technology has gone up significantly and could continue the momentum in 2021 as a bet on future.
/Shyam
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