With everything going on in today’s world, the 24-hour news cycle can feel relentless and overwhelming—especially as we move closer to the upcoming election. I recently watched the Netflix documentary “The Social Dilemma,” which highlights a lot of these same feelings.

After talking about this with my partner Maira Thompson, we agreed that maybe taking a break from the noise wouldn’t be such a bad idea. For this quarter’s commentary, I am doubling down on my efforts to focus exclusively on the data, and not the noise.

Fortunately, our investment approach, which is a disciplined application of a quantitative investment process, helps keep our focus on the proper investing criteria and not get distracted by the noise. Right on cue, the U.S. Economy has followed the same V-shaped recovery as the stock market – just two months behind. The stock market began its advance during the extraordinary two-month lockdown recession from March to April, which saw payrolls decline by 22 million and the unemployment rate soar from 3.5% to 15.1%.

Through September, nearly half of jobs lost have been recovered and the unemployment rate has fallen to 7.8%. Clearly, the economy is not yet back to pre-pandemic levels and human and economic hardship, especially among the most vulnerable, is high. The economy’s improvement in backward looking data like the Atlanta Fed’s GDPNow tracking model shows Q3 real GDP up over 30%. More anticipatory or coincident data like mobility, airlines miles traveled, OpenTable reservations and the ISM Non-Manufacturing Index (NMI), which rose in September to 57.8, shows expansion for the fourth month in a row. All of these statistics corroborate the V-shape advance.

The Path Forward

As noted above, near-term earnings and economic growth for many parts of the economy appear on firm footing. S&P 500 Q3 earnings exceeded estimates at a record pace and service industries in which workers can stay-at-home or manufacturers who can undertake health protocol adjustments are doing quite well. Conversely, air travel, hotels, restaurants, in-person education and socially dense leisure and entertainment activities continue to suffer as the persistence of the 7-day average of new COVID cases and the lack of a COVID vaccine limits re-opening.

Some portion of the improvement in economic activity can be attributed to the CARES Act’s federal stimulus payments, expanded unemployment benefits and the Fed’s use of emergency lending tools to support credit markets. In lieu of a generally available vaccine, we believe that a continued successful path forward will require additional government support as the expiration of PPP loans may push temporary layoffs to permanent ones and cause consumer demand to sputter as supplemental unemployment insurance benefits expire. Unfortunately, political wrangling has delayed the passing of an COVID support package.

To Lend, but Not Spend

The biggest recent cheerleader for additional fiscal stimulus has been Fed Chairman Jerome Powell. Committed to using his emergency lending powers to support credit markets until maximum employment is reestablished, it appears as though monetary policy will remain accommodative, keeping short-term interest rates near zero till 2023. Powell has repeatedly emphasized that the Fed has the limited power to lend, but not the power to spend. This authority to spend rests with Congress. Essentially, the Fed is eager to buy (lend) what the Treasury sells (to fund government stimulus), but it cannot make direct expenditures.

Prior to the pandemic, the Fed followed its dual mandate of full employment and target inflation of 2% by providing an upward bound. Breaking the upper bound was introduced by prior Fed Chair Janet Yellen, as she discussed the concept of hysteresis or letting the economy “run hot”. Last month, Chairman Powell added flexibility to this objective by “seeking to achieve inflation that averages 2% over time, and therefore judges that, following periods when inflation has been running persistently below 2%, appropriate monetary policy will likely aim to achieve inflation moderately above 2% for some time.” Taken in sum, clear Fed guidance, depressed inventories, low long-term interest rates, strong ISM Export Activity and residential housing construction on the verge of exploding, should keep a fragile, bifurcated economy moving higher into Q4 and the beginning of 2021.

The views expressed are those of the author(s) and do not necessarily reflect the views of Clark Capital Management Group. The opinions referenced are as of the date of publication and are subject to change due to changes in the market or economic conditions and may not necessarily come to pass. There is no guarantee of the future performance of any Clark Capital investments portfolio. Material presented has been derived from sources considered to be reliable, but the accuracy and completeness cannot be guaranteed. Nothing herein should be construed as a solicitation, recommendation or an offer to buy, sell or hold any securities, other investments or to adopt any investment strategy or strategies. For educational use only. This information is not intended to serve as investment advice. This material is not intended to be relied upon as a forecast or research. The investment or strategy discussed may not be suitable for all investors. Investors must make their own decisions based on their specific investment objectives and financial circumstances. Past performance does not guarantee future results.
This document may contain certain information that constitutes forward-looking statements which can be identified by the use of forward-looking terminology such as “may,” “expect,” “will,” “hope,” “forecast,” “intend,” “target,” “believe,” and/or comparable terminology (or the negative thereof). Forward looking statements cannot be guaranteed. No assurance, representation, or warranty is made by any person that any of Clark Capital’s assumptions, expectations, objectives, and/or goals will be achieved. Nothing contained in this document may be relied upon as a guarantee, promise, assurance, or representation as to the future.
The volatility (beta) of a client’s portfolio may be greater or less than its respective benchmark. It is not possible to invest in these indices.
Index returns include the reinvestment of income and dividends. The returns for these unmanaged indexes do not include any transaction costs, management fees or other costs. It is not possible to make an investment directly in any index.
The Russell 2000 Index measures the performance of the 2000 smallest U.S. companies based on total market capitalization in the Russell 3000, which represents approximately 11% of Russell 3000 total market capitalization.
The S&P 500 measures the performance of the 500 leading companies in leading industries of the U.S. economy, capturing 75 of U S equities.
The MSCI All Country World is a market capitalization weighted index designed to provide a broad measure of equity-market performance throughout the world.
The VIX Index is a volatility index derived from S&P 500 options, with the price of each option representing the market’s expectation of 30-day forward-looking volatility. The resulting VIX index formulation provides a measure of expected market volatility on which expectations of further stock market volatility in the near future might be based.
Morningstar is the largest independent research organization serving more than 5.2 million individual investors, 210,000 Financial Advisors, and 1,700 institutional clients around the world.
For each separate account with at least a three-year history, Morningstar calculates a Morningstar Rating™ based on a Morningstar Risk-Adjusted Return measure that accounts for variation in a separate account’s monthly performance, placing more emphasis on downward variations and rewarding consistent performance. The top 10% of separate accounts in each category receive 5 stars, the next 22.5% receive 4 stars, the next 35% receive 3 stars, the next 22.5% receive 2 stars and the bottom 10% receive 1 star. The Overall Morningstar Rating for a separate account is derived from a weighted average of the performance figures associated with its three-, five- and ten-year Morningstar Rating metrics.
© 2019 Morningstar, Inc. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information.
Past performance is not indicative of future results. This material is not financial advice or an offer to sell any product. Not every client’s account will have these exact characteristics. The actual characteristics with respect to any particular client account will vary based on a number of factors including but not limited to: (i) the size of the account; (ii) investment restrictions applicable to the account, if any; and (iii) market exigencies at the time of investment.
Clark Capital Management Group, Inc. reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs. The information provided in this report should not be considered a recommendation to purchase or sell any particular security, sector or industry. There is no assurance that any securities, sectors or industries discussed herein will be included in an account’s portfolio. Asset allocation will vary and the samples shown may not represent an account’s entire portfolio and in the aggregate may represent only a small percentage of an account’s portfolio holdings. It should not be assumed that any of the securities transactions, holdings or sectors discussed were or will prove to be profitable, or that the investment recommendations or decisions we make in the future will be profitable or will equal the investment performance of the securities discussed herein.
Clark Capital Management Group, Inc. is an investment adviser registered with the U.S. Securities and Exchange Commission. Registration does not imply a certain level of skill or training. More information about Clark Capital’s advisory services and fees can be found in its Form ADV which is available upon request. CCM-671