LCK Wealth Q3 2020 Market Outlook

By LCK Wealth Management on July 24, 2020

Executive Summary

• •    Even though second quarter US GDP is expected to be down –34%, financial

markets rallied because central banks around the world implemented aggressive

stimulus measures and some recent economic data improved.

• •    There is a wide range of outcomes in the near term depending on the path of

Covid–19, government stimulus and upcoming US elections, all of which could

disrupt the economic recovery and resilience of financial markets. While we

expect some volatility for the rest of the year, we don’t expect a drop as severe as

the one we saw in March.

• •    Still, it’s too early to take broad investment risk. Rather, we prefer to tilt toward

companies with defensive characteristics and those benefiting from longer–term

trends as the US economy starts a secular shift away from globalization and

toward sectors such as technology and health care. In fixed income, we prefer

high quality as solvency issues increase the longer the pandemic lasts.

• •    Overall, we continue to remain flexible in our investment approach searching for

both growth and income in an uncertain world where both are scarce.  

Global economic shutdowns continued through the second quarter of 2020 as the Covid-

19 pandemic turned out to last longer than many initially expected. As a result, global

GDP is forecast to fall -3.8% for the year and US GDP is expected to fall -5.6% for the

year after a decline of -5% in the first quarter and -33.7% in the second quarter, according

to Bloomberg. Central banks around the world responded to the shutdowns with

aggressive stimulus measures including policy rate cuts, asset purchases, and expanded

liquidity facilities.

Global Fiscal Response to Covid-19 has been Aggressive

Source: Cornerstone Macro

Central Banks Cut Policy Rates and Future Expectations Remain Low

Source: Eaton Vance

In addition to central bank efforts, economic data improved in recent months as some

regions began to reopen. Global mobility data improved and, in the US, industrial

production increased by +5.4% and retail sales increased by +7.5% for the month of June

and initial jobless claims fell for the week of July 4 for the fifteenth consecutive week.

Forecasters now expect US GDP to rise +18% in the third quarter and +6.9% in the

fourth quarter, according to Bloomberg.

Global Mobility Data Improved

Source: Apple Mobility Trends Report

Industrial Production and Retails Sales Are Up and Initial Jobless Claims Are Down

Source: Bloomberg

Investment markets rallied as government stimulus made its way to financial assets and

Wall Street analysts extrapolated early signs of economic improvement despite double-

digit unemployment in the US and the risk of a second wave of Covid-19 that could lead

to school closings and renewed shutdowns.

Government Stimulus Made its Way to Financial Assets

Source: View From the Peak

While Wall Street doesn’t expect earnings to recover until 2021, nearly all markets

recovered somewhat from the March lows with growth companies significantly

outperforming. For example, The NASDAQ, which is 80% weighted in technology,

consumer services, and health care sectors was up +12%, while the S&P 500, which is

53% weighted in the same sectors was down -4%. Concentration in the indices is growing

as well with the top five companies – Microsoft, Apple, Amazon, Facebook and

Alphabet – accounting for 22% of the S&P 500, according to Bloomberg. Even with a passive approach an

investor can be heavily exposed to a small group of very large stocks.

Analyst Earnings Expectations

Source: JP Morgan

There is a wide range of outcomes in the near term depending on the path of Covid-19,

government stimulus and upcoming US elections, all of which could disrupt the

economic recovery and resilience of financial markets. The elections in particular have

long-term implications for taxes, geopolitical relationships and regulatory oversight

particularly in key sectors that have supported the market in recent years such as

technology and health care. While we expect some volatility for the rest of the year, we

don’t expect a drop as severe as the one we saw in March. Even if rising Covid-19 cases

don’t lead to renewed shutdowns, a slow and uneven economic recovery should be

expected based on the impact of weaker demand and constrained supply with markets

range-bound until there is more clarity on when businesses will recover, which is

currently difficult to estimate as more than 180 firms in the S&P 500 withdrew earnings

guidance. According to Bank of America’s fund manager survey a Covid-19 second

wave is the top tail risk followed by the US election, a credit event and populist policies

to end inequality. Outside the US, Europe’s chance of a quick recovery fades as long as

travel and tourism are restricted.

In our view, it’s too early to take broad investment risk. Rather, we prefer to tilt toward

companies with defensive characteristics and those benefiting from longer-term trends as

the US economy starts a secular shift away from globalization and toward sectors such as

technology and health care. For example, communication services offers both growth and

yield in a year with election cycle advertising spending and people stay indoors due to

Covid-19, consumer staples are generally high quality and earn above market returns on

equity and real estate benefits when rates are falling and is less exposed to trade and

global supply chain disruptions. Technology companies have secular tailwinds in cloud

computing, robotics, and AI and have strong balance sheets while health care is one of

the least expensive defensive sectors and Medicare for All regulation risk has moderated.

On the flip side, energy is at risk from next generation energy efficient solutions. Within

each of those sectors companies with competitive advantages, strong balance sheets,

positive cash flow, healthy returns on invested capital, and thoughtfulness around ESG

should thrive.

Solvency conditions will likely continue to deteriorate the longer the pandemic lasts.

With that in mind, we focus on high quality investment grade credits with strong

government support and senior private market loans for investors with long-term capital.

Still, the role of bonds in portfolios is under scrutiny as investors confront an

environment of lower for longer yields. Aggressive fiscal and monetary stimulus

combined with de-globalization should lead to inflation at some point but expectations

are still low despite the threats.

5 Year Forward Inflation Expectations

Source: Federal Reserve Bank of St. Louis

Overall, we continue to remain flexible in our investment approach searching for both

growth and income in an uncertain world where both are scarce.

LCK Wealth is a group of investment professionals registered with Hightower Securities, LLC, member FINRA and SIPC, and with Hightower Advisors, LLC, a registered investment advisor with the SEC. Securities are offered through Hightower Securities, LLC; advisory services are offered through Hightower Advisors, LLC.

This is not an offer to buy or sell securities. No investment process is free of risk, and there is no guarantee that the investment process or the investment opportunities referenced herein will be

profitable. Past performance is not indicative of current or future performance and is not a guarantee. The investment opportunities referenced herein may not be suitable for all investors.

All data and information reference herein are from sources believed to be reliable. Any opinions, news, research, analyses, prices, or other information contained in this research is provided as general market

commentary, it does not constitute investment advice. LCK Wealth and Hightower shall not in any way be liable for claims, and make no expressed or implied representations or warranties as to the accuracy or completeness of the data and other information, or for statements or errors contained in or omissions from the obtained data and information referenced herein. The data and information are provided as of the date referenced. Such data and information are subject to change without notice.

This document was created for informational purposes only; the opinions expressed are solely those of LCK Wealth and do not represent those of Hightower Advisors, LLC, or any of its affiliates.