Boston - Imagine if we had a time machine to September and November.
At Eaton Vance Management, we often ask our investors to imagine that they have access to a time machine and to go forward in time to a date in the future where they have to write the newspaper headline. If I had access to a time machine for the second half of 2020, there are two dates that I would dial in: September 15 and November 4.
Why these two dates?
Well, September is always an important month for stocks. In fact, it's the only month that through history has an aggregate negative return. The other reason mid-September is important is hopefully, by then, kids will be back at school, many businesses will have reopened their offices, and we'll also be on the verge of the seasonal flu season where a potential second wave of COVID-19 could emerge.
November 4 is important because that is the day after Election Day. By then, we should know who the new president is and whether we have a new Congress. That will give us a read on what the likely fiscal and regulatory policies are likely to be in the coming years.
There are two signposts we will be monitoring leading up to those two important dates.
The first is the pace of economic reopening. And here Goldilocks has some advice for us. If the pace is too fast, then we risk a resurgence of the virus and a re-shutting down of the economy. If the pace is too slow, then many small businesses and even some large ones could go under, and some of the temporary layoffs could congeal into permanent ones.
The second signpost we will be monitoring is the breadth of participation in the stock market. Broad market averages, like the S&P 500, are heavily dominated by a handful of large US technology companies. No doubt these businesses are good business models with attractive secular outlooks. But if the economy is to truly and sustainably recover, we will need to see a broader participation of businesses.
This could mean that the laggards begin to lead.
Cyclical stocks, traditional value stocks, small caps, international stocks could be the place to be. Given the binary nature of some of the things we've discussed, the prudent investor should be well served to have balance in their portfolio. Consider some of the pro-risk, pro-cyclical things we've been talking about, but offset that with defensiveness elsewhere in one's portfolio — whether that is cash, short-term government bonds, or even some gold. Whatever the future holds, balance for the prudent investor is always good advice.