Linda S. Parenti, CFA
Chief Investment Strategist
The rebound in equities from the March lows continues, with major stock indices trading once again near the all-time highs seen in February. Between the sharp first quarter drop and gains since, this leaves the index up 5.6% year-do-date including dividends as of yesterday’s close.
Equities have moved higher because Wall Street analysts have been encouraged by steady improvements in the monthly economic and employment data. In addition, corporate profit reports are showing the expected declines were not as bad as feared during the second quarter. Monetary policy is decisively accommodating, which is maintaining interest rates at historically low levels and given a boost to housing activity. Fiscal policy support has also been extraordinary, with expectations running high that eventually more relief will be forthcoming from Washington.
All is certainly far from normal. Unemployment is currently 10.2%, and large segments of our economy are still shut down. Restaurant and store capacities are limited, travel spending is being postponed, and school reopening’s are in question; leaving parents with doubts regarding their availability to go back to work. Until a vaccine receives FDA approval, can be manufactured with scale, and widely distributed, COVID-19 will limit the strength of our economic recovery. Of course, stock prices move based on future expectations. So long as trends are improving, the long-term prospects for equities remains positive.
However, with stock prices back up close to pre-pandemic levels, markets may be at greater risk in the short run for disappointments or unexpected shocks. Of course, surprises cannot be predicted. However, we do know the November elections have the increasing potential to be market moving. This is especially true if there is a full democratic sweep.
So how do you protect your portfolio from a known unknown? You could reduce your exposure to equities ahead of elections, but this is not an optimal choice. You could incur unnecessary capital gains or jeopardize your long-term return potential if you failed to reinvest. A well-diversified portfolio is always the best start. Furthermore, tactically shifting assets within allocations and including holdings that do not necessarily move in the same direction as the stock market may provide a further offset to potential market weakness following elections.
RISKS AND IMPORTANT CONSIDERATIONS
Views and opinions expressed here are for informational and educational purposes only and may change at any time based on market or other conditions or may not come to pass. This material is not a solicitation to buy or sell securities and should not be considered specific legal, investment, or tax advice. The information provided does not consider the objectives, financial situation, or needs of any specific individual. All investments carry a degree of risk and there is no certainty that an investment will provide positive performance over any stated period. Equity investments are subject to company specific and market risks. Equities may decline in response to adverse company news, industry developments, or economic data. Fixed income securities are subject to market, credit, and interest rate risks. As interest rates rise, bond prices may fall. Past performance is no guarantee of future results.