BY STRATEGIC ADVISERS INVESTMENT TEAM - June 29, 2020
We believe the market backdrop has improved, but we remain vigilant
The COVID-19 outbreak continues to be a tragic situation, affecting the lives and livelihoods of millions around the world. However, based on our research, we believe that government efforts to support and gradually re-open economies around the world have brought about more certainty for investors. While we believe the risks of a deep global recession have faded, we are keeping a close eye on risks, as the path of the COVID-19 pandemic remains uncertain.
To help inform our investment decisions in this market environment, we continue to draw on our rigorous research. We pay attention to many areas including consumer spending, weekly jobless claims, manufacturing new orders, banks' willingness to lend, and policy responses. We continue to mine investment insights from managers inside and outside of Fidelity. As well, we keep turning to medical experts and health care specialists to get deep, real-time insights on the effectiveness of various medical treatments, including efforts to develop a vaccine.
Some signs of a steadier economy while risks remain
Based on our research, we believe that efforts to gradually re-open the U.S. economy have yielded some positive signs:
Employment/Consumer Spending Increasing
- Unemployment claims are still rising, but at a slower pace, which historically has coincided with greater stock market stability.
- Nearly 2.5 million jobs were created in May, a surprising show of strength for the job market.
- Mobility data from cell phones indicates Americans are gradually resuming more of their day-to-day activities, and consumer spending has increased.
- Surveys are showing a recovery in manufacturing activity may be underway.
Federal Government Policy Response Continuing
- The Federal Reserve continues to support stability in the bond market and is helping to keep interest rates extremely low; these steps can promote further economic growth.
- The federal government has passed several bills to support individuals, businesses, and the healthcare industry, and is negotiating another spending bill.
COVID-19 Outbreaks and Research Progressing
- On COVID-19, medical researchers around the world continue to make progress on finding helpful treatments and are hopeful they'll eventually find a vaccine.
- While the number of COVID-19 cases continues to rise in the U.S., the health care system has not been overwhelmed.
- Outside of the U.S., both international developed and emerging-market economies have had some early success in re-opening their economies. While some individual countries are still struggling with outbreaks, others are further along in their recoveries than the U.S.
While these signs are encouraging, we are still closely following a few key risks:
- The spread of COVID-19 remains difficult to predict, and infection rates are rising and falling at different rates across the country, so the pace of economic recovery could be unsteady.
- Some countries around the world have had to reverse course on efforts to re-open their economies as additional outbreaks have taken place.
- As the U.S. economy is still in a recession, a number of businesses and jobs are still at risk.
Due to these and other factors, we believe bouts of stock market volatility are likely. Therefore, we remain somewhat cautious on our outlook.
We have increased exposure to stocks and other investments that could benefit from an economic recovery
Given the more recent economic backdrop, we have sought to incrementally increase the level of risk across diversified client accounts in May and June, so that they can potentially benefit from an improving economy. Some of our trades included:
- Increased allocations to U.S. and international stocks, bringing them close to their long-term target allocations.
- Added to high yield bond allocations, as many of these bonds continue to trade at a discount and could reward long-term investors.
- Added exposure to real estate investments, as valuations remain low relative to stocks, and there may opportunities for recovery for long-term investors, particularly in areas related to hosting cloud computing servers, cell phone towers, and warehouses.
- Reduced allocations to investment grade bonds and short-term investments (such as money market funds) to fund the trades above.
We're watching out for you
Markets recovered very quickly from their lows in March, while news headlines on the virus and the economy seemed bleak. Over the last few months, we researched long-term investment opportunities on your behalf, even when markets were moving at unnerving speeds. At the same time, we sought to manage the level of risk in your account based on our research on the U.S. economy. These efforts can help reduce the volatility you may experience in your managed account and give you the fortitude to stay invested through periods of market volatility. This can be important because we believe investors who are patient and disciplined are more likely to reach their financial goals. That's why we're here to help.