Global equity markets continued to gain steam last week as the prospect of a COVID-19 vaccine has generated tremendous economic growth optimism. Market participants have appropriately converted such optimism into potential future revenue streams for domestic and global companies in hopes that consumers ramp up consumption of goods and services. From a pragmatic standpoint, this makes a lot of sense. It also reaffirms the fiscal health of consumers when considering the record high savings rate amidst what seems to be a pent-up demand cycle. Such demand has remained constant based on a work-from-home labor market that has managed to flourish. It has also managed to maintain a fluid motion in our economy unlike anything we have seen in previous recessions. Admittedly, it is hard to build such an optimistic assessment by broadly looking at the labor market, but we must step back and assess the data in an objective manner. The impact of COVID-19 has disproportionately impacted the most vulnerable members of our economy while it has simultaneously sustained wealth (and labor) for most Americans. This dichotomy has been difficult to accurately decipher by economists and has resulted in bullish stock market activity that has perplexed many participants. We urge caution in viewing the current environment as too optimistic. That is not the case, yet. We remained adamant about maintaining and increasing equity market participation during the depths of the bear market and we continue to support that on a forward-looking basis. Our stance is driven by fundamentals in what may transpire to be a less concentrated market rally. Additionally, as the global economy further breaks free from the restraints of COVID-19, the upside within global equity markets remains ample for growth as it may be fueled by accommodative fiscal and monetary policy (in addition to hefty savings accounts).
With that in mind, how can an investor fully capitalize on renewed growth prospects over the next two years? In our view, the best investment management tool is one that remains grounded in global diversification. You have likely heard that before and you may even question its validity when considering the lack of diversification benefits over the recent past. The last three years have produced a global return profile that has been dominated by the S&P 500, leaving all other domestic and international indices in the dust (on a relative basis). As a result, it has become easy to be immersed in the love affair that diversification does not work in the short-term and that the S&P 500 resembles the best return profile over the long-term. Buyer beware. The only correct answer is that no one knows what the future holds, and an investor should remain appropriately diversified in a way that captures opportunities when the tide turns. It is easy to forget that international markets outpaced the S&P 500 by nearly 30% in the ten-year period that ended in December 2008. That rolling return even managed to attain a positive absolute return, despite the worst financial crisis since the Great Depression. As we assess the current environment, our internal belief is that the prospects of international diversification may once again resume and, in our view, we are starting to see the early signs of such developments. Fiscal and monetary accommodations in Europe are projected to be notably stronger than what their response has been to previous recessions. This may also bode better due to a banking system that will remain capitalized. On the Asian front, markets and economic growth may likely recoup faster than anticipated due to a more dominant COVID response relative to the U.S. We are starting to see the early signs of that within manufacturing and industrial production data. We are also seeing early signs of marginal stock market outperformance over the immediate short-term. Over the past four months, international equities have posted strong gains above and beyond that of the S&P 500. It is not a coincidence that promising vaccine news have also been rampant during that exact same time frame. We remain highly optimistic of the global re-opening trade and we are positioned to capture opportunities on a global scale.
Edison Byzyka, CFA – Chief Investment Officer – Credent Wealth Management
Investment advice offered through CX Institutional, a registered investment advisor.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly. The economic forecasts set forth in the presentation may not develop as predicted.
All return data sourced from Bloomberg.
All other data soured from Bloomberg, through the release of monthly figures from the Department of Labor, Bureau of Economic/Labor Statistics, U.S. Census Bureau, or from the Federal Reserve and any of its affiliated regional locations.
Small Business Optimism sourced through NFIB. Small business hiring plans sourced through NFIB. Consumer sentiment sourced through the University of Michigan.
Earnings data sourced through Bloomberg Intelligence and through Bloomberg’ earnings analysis composites. Interest rate cut/rise probabilities are sourced from Bloomberg’s tracking of futures contracts tied to the Federal Funds interest rate.
Manufacturing data – Markit PMI – Bloomberg
Economic Policy Uncertainty data sourced from Bloomberg via The Baker, Bloom, and Davis Index.
The Standard & Poor’s 500 Index is a capitalization weighted index of 500 stocks designed to measure performance of the broad domestic economy through changed in the aggregate market value of 500 stocks representing all major industries.
International markets are represented by the MSCI EAFE.