- As we discussed in our recent article, the S&P 500 concentrated drastically into its 5 largest market cap companies. Just those 5 companies made up 20% of the S&P 500 (!), showing this particular index’s value reflects only a small percentage of companies that compose it. The story of the “S&P 495” was more aligned with the economic turmoil we have seen over the past quarter.
- For the most part, other areas of the capital markets, whether equities or debt, were pushed higher by the forceful Quantitative Easing (QE) the Federal Reserve is pumping into the economy.
How did Proxy react in this scenario:
- In our Conservative models, we remained overweight US Treasuries, US Munis, US MBS and smaller positions elsewhere. No real presence of negative bonds so far.
- In our Core Equity models, true to form, after a massive decrease in March, we positioned to capture some of the rebound, albeit very cautiously still, as our algorithms did not give credence that the worst is behind us.
- We added exposure to China (KWEB), then to the S&P 500 (IVV), and lastly, in mid-June to we added exposure to Midcaps and Developed Europe and Asia.
What we are monitoring for the near future:
- We believe we are in the middle of a very important time in the markets. Not since 1929 has there been such a diversion between market function and stock price, between real economy and capital markets. Equity markets are ripping higher based on stimulus and from enthusiasm in a handful of stocks. Debt markets are being bought directly by the Fed.
- Those factors, combined with the fact that we still don’t know what 1/3 of US companies are forecasting for the second half of the year (guidance was and still is being pulled). We don’t believe it is time to fully lean in.
- We are watching the momentum in the US indexes closely, so as to not “fall over the top”, along with China, who has started to show wearisome signs just this week, with new trade talks and Hong Kong issues heating up. We remain cautious and calculated.
- Quarter 3 has little chance of revealing a vaccine to cure the pandemic and waves of closures. It will also finish on the heels of the US Presidential elections in the 4th quarter. We don’t see a lot of concrete reasons to believe volatility is behind us just yet.
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