Shifting Ground
The news of a Biden/Harris election win and heightened prospects for a COVID-19 vaccine are being digested by markets today. As for the former, news agencies declared Democrat Joe Biden president-elect and control of the Senate is to come down to two run-off races in Georgia. For the latter, hopes of a COVID-19 vaccine linked to an announcement of progress toward a vaccine sent global stock indices soaring this morning. The ground beneath this year’s two most dominant themes — politics and pandemic — is moving.
The political shift is assumed to be toward the “middle” with an expectation of divided government. While the Senate race outcome may be held off until January, a Biden win and divided Congress is likely to give way to incremental, rather than sweeping, change. Such an outcome narrows the range of potential effects for investors, providing some sense of stability for markets. The country has encountered deadlocked situations before, at times, with surprisingly positive outcomes for financial markets.
Just as divided governance may provide some temperance in the political sphere, so too does the current reality of COVID-19 in the realm of health and welfare. As we write this, the United States is reporting record numbers of new cases with almost 800,000 cases in the past week and over 1.3 million new cases in the past two weeks (Chart A, below), according to data from Johns Hopkins University. The country now has more than 9.4 million active cases as of last Wednesday. These numbers are significantly higher than in the spring and summer waves. Several states are implementing or planning to implement new restrictions to curb the spread of the virus. In this way, the potential for a difficult winter ahead due to COVID-19 weighs on the minds of many, despite good news on the vaccine front.
Chart A
U.S. COVID-19 Cases
Lift Continues
As the summer ended and fall set in, we found that most trends seemed to support continued expansion. The bounce-back from the onset of the pandemic and related shutdowns, supported by $2.4 trillion (11.8% of GDP) fiscal measures and massive monetary policy supports, continued into the fall. For example, the October ISM Manufacturing Index, a measure of expected manufacturing output, rose to a two-year high of 59.3 from 55.4 in September. Also, the 4-week average of weekly jobless claims fell to 787,000, down from an April record of 5.5 million, implying continued progress toward job market recovery. Lastly, the U.S. stock market has risen in value to a record high of nearly $39 trillion, 8% above the February pre-COVID-19 high of $36 trillion, and 70% above the March low of $23 trillion.
Based on this and other incoming data, we see conditions as remaining favorable for growth, and our near-term forecast path for the WCA Barometer (below) remains favorable for equities. Equity exposure was increased, and bond exposure decreased to account for some improvement in the near-term outlook at the start of the month.
Indeed, major themes are shifting in important new ways. Politics and the pandemic have the potential to shape markets in the weeks and months ahead.
Chart B
WCA Conditions Barometer
Disclosures:
WCA Barometer – We regularly assess changes in fundamental conditions to help guide near-term asset allocation decisions. Analysis incorporates approximately 30 forward-looking indicators in categories ranging from Credit and Capital Markets to U.S. Economic Conditions and Foreign Conditions. From each category of data, we create three diffusion-style sub-indices that measure the trends in the underlying data. Sustained improvement that is spread across a wide variety of observations will produce index readings above 50 (potentially favoring stocks), while readings below 50 would indicate potential deterioration (potentially favoring bonds). The WCA Fundamental Conditions Index combines the three underlying categories into a single summary measure. This measure can be thought of as a “barometer” for changes in fundamental conditions.
Standard & Poor’s 500 Index (S&P 500) is a capitalization-weighted index that is generally considered representative of the U.S. large capitalization market.
The S&P 500 Equal Weight Index is the equal-weight version of the widely regarded Standard & Poor’s 500 Index, which is generally considered representative of the U.S. large capitalization market. The index has the same constituents as the capitalization-weighted S&P 500, but each company in the index is allocated a fixed weight of 0.20% at each quarterly rebalancing.
The Washington Crossing Advisors’ High Quality Index and Low Quality Index are objective, quantitative measures designed to identify quality in the top 1,000 U.S. companies. Ranked by fundamental factors, WCA grades companies from “A” (top quintile) to “F” (bottom quintile). Factors include debt relative to equity, asset profitability, and consistency in performance. Companies with lower debt, higher profitability, and greater consistency earn higher grades. These indices are reconstituted annually and rebalanced daily. For informational purposes only, and WCA Quality Grade indices do not reflect the performance of any WCA investment strategy.
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