The market posted its best August return since 1986 as the S&P 500 increased by +7.2%. After positive returns in five consecutive months, the market is now up by +9.7% for the year. The S&P 500 hit a new intra-day all-time high on August 31st at 3,515. In fact, August was the first time ever market closed above 3,400 and 3,500. We continue to highlight that 2020 has been a roller-coaster year as the S&P 500 fell by nearly -34% from February 19th to March 23rd before increasing by almost +58% since then. As we have done over the past several months, we will provide an update on the four factors driving the market and on our outlook and positioning.

• Covid-19: Data on the coronavirus was encouraging in August. New Cases: Goldman Sachs reported that the rate of daily confirmed new cases has fallen by a third since late July to about 130 per million population. While the trajectory is positive, the US is still averaging about 40,000 new cases per day as of month end. Testing: The White House reached an agreement with Abbott Labs to purchase 150 million covid tests that can provide results in 15 minutes without the use of a lab. This has the potential to be a substantial breakthrough as increased testing is critical in the fight against the virus. Treatments and Vaccines: According to the Milken Institute, there are currently 316 treatments in consideration and 204 potential vaccines in development (these numbers are growing daily). Globally, there are 26 vaccines now in clinical testing with 6 currently in phase III trials. Although progress is being made, we still remain concerned about a second wave of the virus that coincides with flu season.

• Monetary Policy: There was major news from the Fed in August as Chair Powell formally announced a change to the FOMC’s Statement on Longer-Run Goals and Monetary Policy Strategy to reflect average inflation targeting. Historically, the Fed has typically increased interest rates when inflation started to rise toward the old 2% objective. Under the new policy, the FOMC now “seeks to achieve inflation that averages 2% over time.” This subtle change is very important for monetary policy going forward. Essentially, it means that interest rates are likely to stay lower for a longer period of time. Assuming the Fed sticks to this policy, they are willing to let inflation rise above 2% for some time before raising interest rates. The Fed’s policies and guidance on future rate increases have already helped aid the economy, lower interest rates, calm credit markets, and boost equity prices. The Fed’s new framework should help continue to aid these areas moving forward.

• Fiscal Stimulus: We were surprised that Congress was not able to agree to an additional fiscal stimulus package before their August recess (vacation). After negotiations broke down, President Trump signed several executive orders, including one to offer $300 to $400 per week in enhanced unemployment benefits. The exact amount will vary by state and could take weeks to disperse. As of this writing, Democrats and Republicans remain about $1 trillion apart on the size of the new stimulus bill. The most contentious issues remain the size of the unemployment benefit and additional funding for state and local governments. We are still optimistic that a deal will eventually be reached once Congress returns to Washington after Labor Day.

• Economic Data: While the United States officially entered into a recession in February, the economy likely bottomed at some point in April or early May, and has been slowly recovering since. Consumer Spending: According to high frequency data, consumer spending reached 94% of the pre-virus level in late August, up from an April bottom of 80% (Goldman Sachs). Consumer spending data is critical as it drives about 70% of GDP. Labor Market: The nonfarm payroll report has shown gains for three consecutive months as the unemployment rate declined from 14.7% in April to 10.2% in July. The August jobs report will be released on September 4th and the current consensus estimate is for the unemployment rate to drop to 9.8%. Going forward, the magnitude of reopening, consumer activity, and recovery in the labor market will vary based on the prevalence of Covid-19 cases. We firmly agree with the Fed’s assessment that, “the path of the economy will depend significantly on the course of the virus.”

Due to the market increase, the valuation (forward price-to-earnings ratio) of the S&P 500 has reached the highest level since the tech bubble of the late 1990s. In our opinion, the current market valuation is cause for concern rather than panic, and it reinforces our decision to shift portfolios more defensively by trimming equity positions in recent weeks. This does not mean that we are forecasting an imminent decline (markets can always go further than what we or any other experts deem appropriate). Rather, we believe it is prudent portfolio and risk management to take some profits after the S&P 500 increased materially despite several risks that remain prevalent. Key risks still include an increased spread of Covid-19, tensions between the US and China, and the upcoming elections. On the equity side, we are tilted toward high quality US large cap stocks (we allocate across regions, countries, market caps, factors, sectors, and industries). On the fixed income side, we remain focused on achieving ballast, stability, and income while accounting for short-term cash needs. We will continue to utilize our time-tested investment process based on risk management, asset allocation, and security selection as we monitor new developments and maintain critical flexibility to take advantage of opportunities as they arise.