Three Key Thoughts:

1. Like Trump, COVID Wants the Headline

2. Post-Election Prep: Blue Wave Alert

3. China’s Recovery Continues

Like Trump, COVID Wants the Headline

Perhaps we shouldn’t be surprised that President Trump and COVID-19 would one day meet face to face. Ever since his improbable run for president began, Trump has done his best to always “be the headline.” And so it has proceeded throughout the Trump presidency that he has always strived to deliver the biggest, the best or the smartest, regardless of whether those claims had any support. Ironically, it was in those moments without much fanfare that he actually had some notable achievements.

Then along came COVID-19, a challenge unlike any other Trump, or our country for that matter, had faced in modern history. Defying conventional wisdom about viruses, it spread asymptomatically. As we scrambled to ramp up the supply of ventilators, it proved that ventilators might be more harmful than helpful. COVID even tricked our own immune systems to attack so virulently that patients were killed by the immune response. All the while, COVID kept coming back to the headline, and it hasn’t really let up since February.

Last quarter, we coined the phrase that we are starting the “learning to live with COVID” phase. Just like we adjusted to intrusive new security measures after 9/11, we are gradually adjusting to a new environment in which we are all more cautious about how we go about our daily lives with COVID always in the background. We believe this phase will continue well through the time when vaccines are widely available.

Today, we have two major concerns about the ongoing economic impact of COVID. The first is with small businesses, thousands of which are struggling to stay positive and stay afloat. If their progress is interrupted, the economy will have a very hard time mounting a sustained recovery. Our second concern is with school re-openings. While local districts and regional politicians control the decisions, we cannot expect our economy to get back to normal until schools are fully re-opened. That doesn’t mean we advocate opening them at all costs – it is just a fact that so many parents’ work lives revolve around their ability to have their children in school, those parents will not be fully productive workers until their children are safely attending school. We don’t have answers or predictions about either of these concerns – we will just be watching them to see how or whether they can be resolved over the coming months.

Post-Election Prep: Blue Wave Alert

The markets, meanwhile, have focused on the improvements in the economy, coming out of the major shutdowns in the second quarter, with stocks reaching new highs in August. The enormous stimulus programs from the Federal Reserve and Congress have helped the markets stay optimistic about continued recovery. September saw a bit of a hiccup as further stimulus plans stalled in Congress. While both sides have an interest in reaching an agreement, the Democrats believe they have the upper hand because they are pretty confident of a “blue wave” that will sweep them into the presidency and control of Congress. Right now, the markets seem to agree that more stimulus is coming, whether before the election or soon after.

If the blue wave becomes reality, we will need to consider the kinds of changes that may take place in Washington that could impact the economy and corporate earnings. In very broad terms, higher taxes on corporate earnings and a less friendly regulatory environment are likely to be negatives for the stock market. However, more stimulus will be positive in the short run unless it becomes a source of inflation that drives interest rates higher. Bottom line, it is time to be thinking about the possible policies and their implications but not a time for drastic changes to portfolios. We have warned on several occasions about the danger of making investment decisions based on political outcomes. The US economy is driven mostly by strong, fundamentally positive factors that are more powerful than the marginal changes politicians can make.

China’s Recovery Continues

In China, the success of their harsh, swift shutdowns and the government’s use of technology to control the spread of COVID-19 are sources of national pride. And President Xi has seized on this pride to launch new initiatives focused on making China more self-sufficient. In particular, he is focused on building technology capabilities that China currently must either import or license from the rest of the world.

Meanwhile, the economic data coming out of China points to the continuation of a strong recovery from the COVID-induced slowdowns of early this year. And their stock market also continues to do well, with the second best performance of any country in the world so far in 2020.

Last quarter, we mentioned Xi’s move to place Hong Kong under full control of the Communist Party. Apparently, his bet is that more closely aligning Hong Kong with the mainland will help its economy grow more than it would by being a unique standalone entity. Certainly, this also fits with his plan for China self-sufficiency. What remains to be seen is how the rest of the world responds to a much less free Hong Kong.

Investment Implications

We have long discussed the three themes that have been prevalent for more than a decade now: US stocks over foreign stocks, growth stocks over value stocks and US dollar denominated assets over non-dollar assets. There have been a few hints at change recently, but the actual shifts have been small. We will continue to look for signs of changing currents that would cause us to reconsider asset allocations.