the coming weeks and months.
1.) Political Risk - Even if we weren't dealing with COVID-19, I would be warning of potentially increased volatility as we move closer to the November elections. The most considerable risk to the markets is a shift in tax policy. A Democrat sweep of both houses of Congress and the Presidency could result in a rollback of the Tax Cuts and Jobs Act of 2017. Stock prices are a function of the outlook for corporate earnings and the potential growth of earnings. An increase in expenses, including tax payments, reduces corporate earnings and would require a repricing of stocks.
2.) China - Tensions between the U.S. and China have been elevated for some time. We saw markets react negatively as tariffs were imposed. Anything that derails the trade agreement or puts future trade developments at risk could be a drag on markets. China's willingness or ability to fulfill Phase One of the trade agreement has been in question. Supply chain problems uncovered during the pandemic have strengthened calls for repatriating critical manufacturing to the U.S. In recent weeks, politicians have increased pressure on China to take responsibility for and make reparations for the economic damages resulting from the Global Pandemic. The future of U.S./China relations and the economic impact remains uncertain.
3.) Stock Buybacks and Dividends - Corporations buying back their stock and paying dividends support stock prices. During first-quarter earnings calls, many companies announced that they would discontinue planned stock buyback programs and suspend dividend payments. If this trend expands or the expected duration increases, it could put downward pressure on stock prices.
4.) COVID-19 - A Global Pandemic wasn't in anyone's economic forecast coming into 2020. Experts believe there are several possible directions the virus may take. Each would have a different effect on the economy and markets. The virus could burn-out on its own as we move through the Summer. The virus could remain at a lower level through the Summer and then resurge in the Fall. There could be an effective treatment or vaccine that would eradicate the virus, or this may become something we must learn to live with like the cold or flu viruses.
5.) Reopening the Economy - There has been a great deal of optimism among market participants that the economy can be reopened smoothly, and that economic growth will resume. The reopening of the U.S. economy will hinge on the consumer. Pent-up demand may fuel consumer spending. However, several things could negatively impact consumer confidence and spending. Fear of contracting COVID-19 could reduce consumers' willingness to return to normal levels of activity. A spike in virus-related hospitalizations could necessitate a return of more stringent government restrictions. Following recessions, people often use available resources to reduce debt and increase savings rather than spend and consume. While I remain cautiously optimistic, the range of potential outcomes makes estimating economic activity and corporate earnings difficult.
Portfolio Update - Every morning, I check the performance of accounts across each investment objective compared to a benchmark. Though the performance of an individual portfolio may vary, accounts are currently in-line with or outperforming their benchmarks. Although portfolio models remain overweight cash, we've been able to maintain performance with lower market exposure by having a portfolio overweight to Large Cap Growth, Technology, and Healthcare. These sectors have outperformed the broader market. I've added an S&P 500 High-Quality investment. This fund selects companies from the S&P 500 that exhibit strong balance sheets and lower levels of debt. This week I added exposure to Consumer Staples. This gives us exposure to companies who sell things the consumer is likely to continue buying. I also added a Corporate Bond position. Corporate Bonds offer a higher yield than many other options. During periods of economic uncertainty, corporate bonds carry a higher risk of default. However, the Federal Reserve has taken the unprecedented step of buying corporate bonds, theoretically providing unlimited support for this sector of investments.
Economic Update - Rather than going through the economic data, suffice it to say, it's terrible. We review economic data to gain insight into the current and future path of the economy. The current economic data is less useful because it isn't being shaped by natural economic forces but rather by government intervention. On the one hand, the government is limiting business activity in the name of public health while also providing trillions of dollars in fiscal and monetary support. We don't yet know the full impact these competing interventions will have on the real economy.