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Q3 Commentary

  • The Third quarter of 2020 started off strong for the equity markets, extending the extreme rebound from the lows we saw set in March. Better then expected Q2 earnings and optimism a global economic recover from the COVID-19 spring shutdown continued to drive the rally early on.  The Fed indicating that they will maintain a loose monetary policy for the foreseeable future helped to support the rally as well.  However, September told a different story as COVID cases spiked and the U.S presidential election neared, the markets pulled back and tech stocks lost steam for the first time since the spring.
  • Q3 for fixed income was mostly uneventful. This was not surprising as interest rate remained extremely low and investors continued to plow cash into the equity market. With the 10 year treasury at .62% to begin the third quarter, investors seeking income took on more risk, shifting to US high yield and emerging market debt.

How did Proxy react in this scenario

  • In our Conservative models, we remained mostly overweight with US Treasuries, US Municipals and US MBS. With the potential for extreme levels of volatility in the equity market, we believed it prudent to stick with higher quality debt to continue to protect on the downside.
  • In our Core Equity models, with so much reaming uncertainty, we did not push 100% in equity, but did increase out exposure beyond out allocation towards US Large Cap (IVV & QQQ).  With a reduction in volatility in the first 2 months of Q3, our algorithms pointed us towards in US Mid cap and as well us Developed International.
  • Proxy Core Growth also held a slightly more conservative approach, keeping a small portion of the portfolio in GOVT, as we waited for opportunities .  In a volatile tailed end of the quarter the strategy outperformed the NASDAQ Composite index by more than 5% during the month of September.

What we are monitoring for the near future:

  • Looking ahead in Q4 2020, there are quit a few significant and impactful situations we will be keeping an eye on.  COVID-19 and any progress on a vaccine will continue to be focus, especially now as numbers continue to spike heading into the winter months. Q3 GDP and earnings will either support the high expectations of the economic recovery and soaring stock market or potentially indicate a less enthusiastic scenario.  So many of the big tech companies which have lead the way in the stock market’s historic “V shaped recovery” will not only need to justify their high stock prices with strong earnings and guidance,  but also meet or exceed the lofty expectations set forth by investors.
  • We will also be very much focused on the next US economic stimulus package which appears is now tied to the upcoming US elections on Nov 3rd. These Presidential 2020 elections are the most important in recent history as the US looks for direction in navigating a global pandemic, the resulting economic implosion and growing social and civil unrest.  With each presidential candidate proposing significantly different approaches to guiding the US through these times, the results of this election will undoubtedly spark strong reactions. With so much uncertainty remaining, we believe we will continue to see volatility in the market and so we will cautiously stay the path, ready to react and adjust as needed.

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