In March, the stock market fell sharply as investors sold stocks and hoarded toilet paper.
Since then, the stock market has recovered quickly. The Federal Reserve has supported markets through significant asset purchases. Congress has delivered enhanced unemployment benefits and forgivable loans to businesses. However, there are reasons to believe we could experience additional volatility in the next few quarters.
Betting markets for the election indicate Biden may have a lead over Trump. They also show the Democrats have more than a 50% chance to gain control of the Senate. Biden’s campaign platform includes increasing the corporate tax rate from 21% to 28%. If implemented, this could result in a fall in the US stock market. This change would make foreign assets more attractive relative to domestic holdings.
Some research suggests that over the long run, small company stocks outperform large company stocks. However, in times of stress large companies and companies with well-known brands have been able borrow money or sell shares to raise cash more easily than smaller or lesser known companies. We expect that in another downturn, larger company stocks would be in a better position to survive and thrive than small company stocks. In addition, we expect companies with quality balance sheets and less debt will also be in a better position if another period of illiquidity emerges.
Finally, we expect that if we enter another period of volatility, the Federal Reserve will intervene via additional asset purchase programs. This could drive interest rates even lower than their current low levels, leading to further bond appreciation. It is possible that their interventions may more than offset the above risks, leading to a continuation of strong stock market performance.
Because of these market views, we plan to reduce our exposure to real estate investments, small capitalization stocks, and United States stocks while buying more international stocks, large capitalization stocks, and long-term treasury bonds. We do not plan to sell all of our US stock exposure. We intend to make moderate changes. As always, if you have experienced any significant changes in your financial circumstances, please contact us so we can evaluate with you whether a change to your baseline portfolio allocation would be appropriate.