📝 Market Commentary for 2020-Q3
This quarter, we look at the updated Fed policy, the sector rotation to industrials, and the volatility surrounding the events of 2020.
We are a California-based registered investment advisor and investment thought leader, updating you on important things that we saw last quarter in global financial markets. This is a modified commentary of what we create for our clients, and you can find the original versions along with proprietary data and charts here.
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Fed announces significant policy change towards inflation.
(Conscious Capital Advisors)
At the end of August 2020, Jerome Powell announced a significant shift in the monetary policy approach for the United States. Instead of raising rates when unemployment falls to front-run a rise in inflation, the Fed will now "wait and see" on what happens to inflation when the economy reaches full employment. The policy adjustment suggests interest rates will remain lower for more extended periods, so long as inflation remains in check. In addition to the policy change in inflation, the Fed also announced a shift towards its employment approach, focusing on boosting employment among low- and moderate-income communities, who are more likely to face unemployment.
Market participants have expected this change as the U.S. economy continues to struggle with slowing growth. Despite the massive amounts of stimulus in the past ten years, the Fed has failed to meet its 2% inflation target. Unfortunately, this means that investors may experience more of what's happened since 2008 - a challenging investing environment, low yields, low potential returns in many investments, and an increased necessity to take multiple risks to reach return targets.
A potential sector rotation into industrial stocks emerges.
(Conscious Capital Advisors)
Source: Stockcharts.com
The value of major technology firms deflated in September 2020, and we observed a relative shift away from the technology sector into the industrial sector. Industrial stocks have been exhibiting a potential basing pattern for the last two quarters, and combined with the coincidental relative performance of basic material companies and developments between the U.S. and China, this represents a possible shift in the global economic narrative.
There is a switch when a nation’s mentality shifts from an intellectual reorganization (through technology) to a physical one (through industrial machinery). The growing schism between the U.S. and China will likely create a demand for more domestically manufactured products, especially ones that are essential to national defense or healthcare. One of the most popular investment themes is the idea of “deglobalization,” as the coronavirus has revealed where the U.S. supply chains are most vulnerable. Conscious Capital’s viewpoint is that this has already happened, and industrial sector equities are beginning to reflect such a change. In addition to a mental shift, there also remains the possibility of a major infrastructure project commissioned by the government. A definite possibility given the age of infrastructure assets in the United States.
Markets remain on edge with the U.S. election, coronavirus, and Chinese tensions running high.
(Conscious Capital Advisors)
The upcoming U.S. Election in November 2020 remains a significant unknown for investors. A long list of concerns includes President Trump’s unpredictable behavior regarding a potential transfer of power, Chinese regional aggressions, and the course of the coronavirus pandemic. Measured by the CBOE Volatility Index (“VIX”), stock market fears remain at an elevated level, demonstrating higher than average uncertainty in financial markets. By their nature, political events are highly unpredictable and can have potentially significant effects on national economies. While not a guarantee of the preservation of capital, hedging and alternative asset strategies can possibly protect investors and even take advantage of an uncertain environment to create returns.
About Joseph Lu, CFA®
Joseph has over a decade of experience as an investment professional, primarily in quantitative analysis and portfolio management roles. He is the founder and managing director of Conscious Capital Advisors and a CFA® Charterholder. The CFA charter is a globally respected, graduate-level investment credential by the CFA Institute, a global association of more than 90,000 investment professionals working in over 133 countries.
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