SUMMARY. Fears of Covid-19 "second wave" re-emerged in the media during the week. Although cases have risen (not surprising tied to mass rioting) we do not expect this to change the fact that the reopening of the economy has started. Further, by and large we do not think it will alter the course of the reopening tied to rising public opinion against reversing it. More importantly and irrespective of a "second wave" impact, visibility on the 10 vaccine candidates now supported by the US government may increase by Summer's end. If so this may act to reduce "second wave" fears rending such fear a mute point. We have seen a clear correlation between vaccine success and investor sentiment.
INVESTMENT IMPACT. Cash/bond/preferred stock levels remain elevated during the week across our model portfolios. Although we view any fears of "second wave" as short lived we recognize valuations in certain sectors maybe elevated. Those valuations may be influenced by not only unprecedented Fed policy, but the timing and strength of the economic reopening. Our view on model stock composition and on valuing them in our models (which we deem benefiting from a return to economic normalcy) is based on analyzing pre-covid earnings power which we believe will return as covid-19 fears subside going into 2021. To reiterate, this is largely the valuation debate ongoing among investors as some believe we will not return to economic normalcy anytime soon. Obviously, we don't concur. We are overweight assets overseas in markets that we believe are depressed such as Brazil where Covid-19 cases are ramping still and markets we believe remain at depressed valuations relative to the US. We are prepared to add hedges (assets that may rise when market falls) to protect assets returns in the short-term if we deem necessary by monitoring "second wave" fear. Thus, why we kept stock exposures lower and cash elevated if such actions are necessary.
Our model portfolio performance has been updated on our website as of 5/29/20.
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