Global Asset Allocation Views – Q3 2020

Jul 14, 2020

Global Asset Allocation Views Q3 2020

2nd Quarter Recap

  • Markets exited bear territory finishing just shy of all-time highs. NBER (National Bureau of Economic Research) finally called the recession when it appears we may already be exiting and entering a new cycle.
  • Energy was the best performing sector recovering from negative futures contracts as speculators were caught needing to settle the physical delivery of oil. Technology finished in second place as investors continued to favor the safety of big tech.
  • As has been the case for the past decade, domestic outperformed international and growth outperformed value. Small caps broke the trend to best the S&P 500 for the quarter.
  • Thanks to quick fiscal/monetary support we appear to have moved into a new bull cycle and have left behind the worries of a bear market rally and a new low.
  • Economic activity continues to rebound though it still remains at contractionary levels. China had a strong PMI number in June and the global economy hopes to build from that strength.

3rd Quarter Outlook

Themes

  • The recession that began in February will be short-lived. We are now entering a new cycle with elevated volatility and the potential for weakness on any poor covid-19 news.
  • Fiscal stimulus will continue as congress looks to support dislocations in the economy, especially in tourist and service sectors. Monetary stimulus has provided a floor to equity markets.  “Don’t fight the Fed”.
  • Yields will stay low near the zero-bound in the short-term as QE has begun anew.
  • Earnings will bounce back in Q3. Investors will reward companies that beat earnings and raise guidance.
  • The dollar seems to have peaked and is now rangebound. This supports international equities.
  • We continue to add risk looking for opportunities of consolidation and an eventual breakout in the previous decade’s underperformers (international, small caps, and cyclical value).

Risks

  • Though credit risks will subside thanks to the Fed’s loan programs and purchases, many companies will continue to file for bankruptcy or permanently cut its workforce. Many unproductive firms have been kept alive with cheap financing and this will have a small negative impact on growth.
  • Covid-19 has not gone away and continues to spread in the sun belt states. A second wave in the fall/winter is of concern for the northeastern states.  There is little support for a second lockdown.
  • The 2020 presidential election is fast approaching. Markets tend to do well leading up to November and favor a split congress.  Betting odds put Vice President Biden ahead of President Trump.  Democrats are expected to win the House and are slightly favored for the Senate.  If Democrats win the Presidency, the House, and the Senate, expect corporate taxes to go up (a negative to the market).  This will not happen if Republicans hold the Senate.  A Democratic sweep could lead to further fiscal stimulus in the form of infrastructure spending.
  • Valuations remain elevated coming out of a recession. 2021 earnings have high expectations to warrant such high multiples.

Allocation Updates

  • In the 2nd quarter we added positions in gold and TIPs (Treasury Inflation-Protected Securities) to provide a hedge against inflation as well as being low correlated assets to equities. We shifted our mid and small cap exposure to focused active strategies with a growth tilt.
  • We are overweight cash, Technology, Emerging Markets, Health Care, and Managed Futures. Continued support for growth and large cap.  “The trend is your friend”.
  • We are underweight Energy, Europe, Treasuries, Small Cap, and Mid Cap. Waiting for the trend to shift to cyclical, small cap, and value.

Written by:  Antonio Belmonte, CFA, Chief Investment Officer

These are the opinions of Antonio Belmonte and not necessarily those of Cambridge, are for information purposes only, and should not be construed or acted upon as individualized investment advice.  Investing involves risk.  Depending on the types of investments, there may be varying degrees of risk.  Investors should be prepared to bear loss, including total loss of principal.  The strategies discussed herein are not designed based on the individual needs of any one specific client or investor.  In other words, it is not a customized strategy designed on the specific financial circumstances of the client.  However, prior to opening an account, Cambridge will consult with you to determine if your financial objectives are appropriate for investing in the model.  You are also provided the opportunity to place reasonable restrictions on the securities held in your account.