Analysis: Tactical Investing Moves for the Remainder of 2020

Equity markets have demonstrated to be mixed through July as well as year-to-date amidst the ongoing impact of the coronavirus, GDP U.S. economy experiencing a -32.9% contraction and strong corporate earnings.

According to FactSet, 84% and 69% have topped consensus earnings and revenue estimates respectively with 63% of companies reporting.  

All three major averages rose in July with the Dow adding 2.4%, the S&P 500 climbing 5.5%, and the Nasdaq Composite rallying 6.8%.

With the Fed and Congress moving quickly to inject the economy with trillions in the stimulus, investors were still trading positively on the conclusion that the world will recover from the COVID-19 pandemic. 

Now that the extra $600 CARES Act unemployment benefit has ended concerns are mounting. Democrats and Republicans have yet to negotiate a deal to replace the Federal Pandemic Unemployment Compensation program.

Plus, with the election which is less than 100 days away, investors are paying closer attention to potential changes that might affect future markets.

According to President Trump, “It would all come crashing down, including your Jobs, Stocks, and 401k’s, if Sleepy Joe ever became President.”

If Trump wins expect lower corporate taxes, regulatory relief, and he will neutralize antitrust enforcement. If Biden wins expect higher corporate taxes, regulatory intervention and a return of antitrust enforcement.  

Asset allocation strategy

A diversified portfolio that includes holdings in a variety of asset classes can reduce overall portfolio volatility and improve risk-adjusted performance.

During times of heightened risks and market volatility, it’s a great time to review your goals and objectives and make sure your portfolio is aligned accordingly.

As for equities, consider a neutral strategic weight / tactical tilt to U.S. large cap & sectors.

Investors have been rewarded with better returns in U.S. equities overexposure than developed international and emerging markets during the past few years. While China was the first country that was first impacted by the coronavirus outbreak, following Europe, these countries appear closer to exiting the pandemic before the United States. 

It might make sense to add or increase your portfolio exposure within emerging markets using the iShares MSCI Emerging Markets ETF (EEM).

However, the growth prospects for developed international countries appear weaker than those for the United States.

While earnings likely bottomed in the second quarter, many sectors are dependent on economic recovery. This should set up for a significant earnings rebound in 2021.

However, with short-term risks at hand, investors should focus on domestic large cap vs mid cap or small cap companies. The reason is that larger size companies normally maintain higher cash balances, lower leverage, and offer better earnings growth than their smaller counterparts.

Growth stocks have dominated value stocks for the past five years and most likely have not peaked out yet, therefore consider Russell 1000 Growth (IWF).

Because second quarter 2020 negative GDP there are some great companies to focus on that offer both great dividends and value opportunities.

Growth outlook

Consider the Russell 1000 Value (IWD) based on better-than-expected results and improving earnings revisions. For large cap sector play, the preferred areas to be invested with back to school sales and holidays revenues upcoming.

Consider the Technology Select Sector SPDR Fund (XLK) and Consumer Discretionary Select Sector SPDR Fund (XLY). For defensive play and dividend income, focus on Consumer Staples Select Sector SPDR Fund (XLP) and Utilities Select Sector SPDR Fund (XLU).  

In fixed income I would recommend an underweight strategic weighting / tactical focus on long term and high yield.

Continued support from the Federal Reserve in U.S. credit markets has helped rally intermediate/long-term investment-grade as well as high yield corporate credit.

Consider exposure to iShares Broad USD High Yield Corporate Bond ETF (USHY) or iShares 20+ Year Treasury Bond ETF (TLT). With a trade war raging and economic indicators vacillating, demand for Treasuries remains strong.

The bond market however is telling us that the Fed is going to be on hold for a longer period of time in raising interest rates and instead plan on being accommodative and supportive of an economy battered by the coronavirus pandemic.

In terms of alternative investing, consider neutral strategic weighting / tactical focus on gold.

Economic uncertainty remains a key driver of gold’s short-term rally. Gold finally achieved a new record above $1,900.

While some feel gold is in overbought territory, we see this rally likely to remain the case up to the U.S. presidential elections in November. Analyst outlook for gold in 2021 is $2,200 to $2,300.

Therefore, consider increasing or adding SPDR Gold Shares (GLD) to your portfolio.