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This quarter’s "top of mind" topics
- Rebalancing to better prepare for a wide range of possible outcomes
- Opportunistic investments in credit, “compounder,” and contrarian strategies
- Revisiting long-term policy in light of questions about inflation, equity returns, and fixed income as a diversifier
The world is a very different place than at the beginning of the year, given the astonishing impact of COVID-19 on the economy and the markets. It’s also very different than at the end of the first quarter, with risk markets having rallied back from steep losses. Of course, what we all really want to know is not where we’ve been but where we’re headed. To help, I focus this quarter on three scenarios and an investment policy game plan for the coming months. I also address several longer-term investment policy questions on the minds of many asset allocators.
Where we are now
Before detailing my scenario analysis, a quick summary of the state of the world:
The pandemic — COVID-19 is still spreading, with the global case count accelerating and the seven-day moving average in the US on the rise again after many states began to ease restrictions. The economic impact is clear. Initial unemployment claims spiked in March, and although they have come down, they are still shockingly high relative to history, as are continuing claims.
Financial markets — The March sell-off in equities was followed by a remarkable reversal through late June. The S&P 500 briefly exceeded its 2020 starting point before falling off somewhat. Commodities also fell sharply but haven’t regained much ground. Fixed income spreads have narrowed significantly since late March but remain meaningfully wider than where they started the year.
Volatility — Volatility (VIX) bears watching. It has reflected the uncertainty of market participants about the nature of the crisis. One possibility is that the pandemic ends up as a true systemic event that is persistent and drives dramatic change in…
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