Fourth Quarter 2020 Executive Summary: 

  • Volatility in financial markets could well rebound as Q4 progresses, given the combination of a potential resurgence of Covid-19 and the upcoming election, which may be contested. In addition, a Covid vaccine for widespread immunization does not seem likely any time soon, while the fiscal benefits of the CARES Act are wearing off. Even still, we see select opportunities in certain asset classes, and believe that active investment approaches should be able to find value.
  • We maintain a small Overweight in Equities and Fixed Income. We slightly reduced our Underweight in Alternatives, and we now have a Neutral position in Cash.
  • The outlook for corporate profits continues to improve at the same time that unemployment remains stubbornly high. Three reasons for strength in the corporate sector: (1) exceptional monetary and fiscal stimulus; (2) cost-cutting — i.e., layoffs; (3) a strong consumer sector that has high savings rates and manageable debt levels.
  • After the election — and especially if Joe Biden is elected — financial markets will likely focus on fiscal policies. Among Biden’s proposals are increases in both the corporate tax rate and the capital gains tax. The two previous hikes in capital gains taxes (1987, 2012) led to a wave of stock market selling.

Download Cornerstone’s Fourth Quarter Market Update and Outlook.