Back in March, at the dawn of the COVID crisis, I wrote two blog posts titled What Now? and What Now, Part 2? My comments focused on the need to remain calm and to try your best to “sit tight”. A fully invested long term strategic approach would pay off, but it would take time; the steep selloff in March notwithstanding.
Here we sit, today, with markets reaching new all-time highs based on the release of new information about vaccines from Pfizer and Moderna that have tested to be 90+% effective. Medical experts still indicate that the next few months, prior to release of the vaccine, will be quite severe from an infection, hospitalization, and death perspective due to the highly contagious nature and large number of existing infections. Capital markets are moving past this period, however, and projecting a robust rebound in 2021.
Many related industries, like travel, leisure, and airlines, have been hurt badly, while targeted strategies like strategies focused on income generation have equally been hurt. Income strategies have lagged due to the prospect of potential dividend cuts from high dividend payers, lease payment delinquencies from real estate, and lower earnings and growth from banks due to low loan demand and low interest rates.
So, the major broad equity indices, overweighted in large cap tech names like Amazon, Alphabet, Apple, Facebook and Microsoft, that rallied strongly, could maintain their positions while other sectors that lagged have the potential to “catch up” and recover as the world rallies into a post-pandemic recovery.
As seen from the chart below, some of the key income generating asset class sectors are still struggling to fully recover to levels seen at the beginning of the year. High dividend strategies (DVY, the bold black line at the bottom) and real estate investment trusts (VNQ) have lagged the most while most classes of bonds (AGG, LQD, and HYG) have recovered (probably mostly due to tremendous buying support from the Fed). The S&P 500 (IVV) leads the pack (the red line at the top). As the economy recovers, the sectors that lagged the most have the most to recover. [Note: Due to the outsized support from the Fed, it is difficult to say if the Treasury bond market will maintain its strength; mathematically, this market has almost no potential for positive returns into the future – see my recent blog posts about bonds for more on this.]
There is certainly reason to have positive feelings about the future. As I recounted in my October blog post Where Do We Go from Here?, the broad outlook given vaccine breakthroughs, fiscal/monetary support, and economies opening slowly with only potential limited pockets of targeted lockdowns is positive and consistent with a long-term strategic approach that captures the broad trends in the economy and the capital markets.