Steady-As-She-Goes
We continue to see improvement in several indicators from a very weak second quarter. It is likely that, after a 30% annualized drop in GDP in Q2, Q3 could see a 25% annualized rebound. Progress is also seen in weekly data such as the Federal Reserve Bank of New York’s Weekly Economic Index (WEI). This index tracks ten daily and weekly indicators of real economic activity scaled to align with the four-quarter GDP growth rate (Chart A, below). The WEI spotlights consumer behavior, the labor market, and production weekly. As beauty is in the eye of the beholder, so too is the interpretation of this chart. The economy continues to grind higher week by week but remains far depressed from pre-COVID levels. Steady-as-she-goes for now is our take so long as improvement persists.
Chart A
Health Trends Mostly Good
Supporting the recovery in the economy is a reasonably supportive healthcare backdrop. This is not to say we do not see continued cases and deaths, but the rate of increase in cases globally is flattening and in the United States is trending lower (Chart B, below). However, we cannot take these trends for granted. Countries like Germany, Spain, France, South Korea, Japan, and Italy have all experienced uptrends in cases recently. Such spikes make it hard to return to life as normal, and threaten job creation and economic recovery in those countries.
Chart B
Election Focus
As we head toward elections this fall, investors’ spotlight will turn to issues likely to impact the economy. How much and in what ways to continue existing fiscal programs will be key. Existing programs, including the Paycheck Protection Program, Health Care Enhancement Act, and the CARES act, provided an infusion of nearly $3 trillion to the private sector recently (Table A, below). Monetary policy actions, including cutting interest rates, $3 trillion in asset purchases, backstopping credit markets, easing lending conditions, and providing forbearance, also provided much relief to the private sector.
There are significant questions about the extent and method of providing support to the private sector during the upcoming months. As elections approach and Congress debates pathways to provide COVID-19 assistance to households, businesses, state and local governments, investors will be looking for clues as to what comes next. For now, we are keeping a steady-as-she-goes approach. CONQUEST tactical asset allocation portfolios are moderately overweight stocks versus bonds given improving trends, for example. We are also continuing to focus heavily on balance sheets and cash generation abilities of companies in equity portfolios we manage. So, at least, the improving trends in the data are taking the lead in our assessment of conditions. At some point, this could change. But, for now, it is “steady-as-she-goes.”
Table A
| COVID-19 Economic Stimulus Programs | Billions $ |
|---|---|
| Fiscal Programs | |
| Paycheck Protection Program (PPP) and Health Care Enhancement Act | |
| Forgivable Small Business Loans | $321 |
| Small Business Loans & Grants | $62 |
| Hospital Grants & Loans | $75 |
| Expand COVID Testing | $25 |
| PPP & Health Care Enhancement Act | $483 |
| CARES Act | |
| One-time Tax Rebates to Individuals | $293 |
| Expand Unemployment Benefits | $268 |
| Food Safety Net | $25 |
| Loans, Guarantees, and Federal Reserve 13(3) Program Funding | $510 |
| Small Business Administration Loans and Guarantees | $349 |
| Aid for Hospitals | $100 |
| Transfers to State and Local Governments | $150 |
| International Assistance | $50 |
| Other | $555 |
| CARES Act | $2,300 |
| Monetary Programs | |
| Federal Reserve | |
| Cut Policy Rate to Zero | |
| Purchased Assets | $3,0001 |
| Committed to Support Flow of Credit | $1151 |
| Encouraged Banks to Lend and Make Loan Modifications | |
| Eased Capital Requirements | |
| Eased Regulatory and Supervisory Requirements | |
| Gov’t Agencies: | |
| Provide 12-Months of Mortgage Forbearance | |
| Provide Loan Modifications | |
| Suspend Late Fees / Credit Reporting | |
| Grand Total Fiscal and Monetary | $5,783 |
| 1. As of August 2020 |
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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