Mid-Quarter Commentary - August 2020

So far in the third quarter, risk assets have extended the rally seen in the second quarter. Already the S&P 500 is up another 9.5% quarter-to-date and posted an all-time intraday high on August 19th. Much of this strength in asset prices has been a result of the amount intervention by the Federal Reserve, but more recently it has been about the length of time the Federal reserve will remain extremely accommodative.  

As during previous periods of monetary easing, which is inflationary by nature, runaway inflation has been one of the risks at the forefront of investors' minds, which would consequently cause the Federal Reserve to tighten its policy. With real interest rates now at historic lows across the yield curve, inflation down the road has already been the topic of much investor conversation over the last two months. We believe that the risk of inflation nearing the Federal Reserve's two percent target within the next twelve months is low. Another macroeconomic theme recently has been dollar weakness, which has been mainly attributable to interest rate differentials between developed economies.  

According to our analysis, equities should continue to outperform fixed income in the third quarter, though these gains will likely moderate, especially as the market begins weigh U.S. Presidential election outcome probabilities. Overweight equities, in terms of asset allocation, is appropriate given the recent rebound in economic stability, mainly as unemployment drops. To couple this, the composition of our large-cap and small-cap is positioned to be more conservative relative to the S&P 500 and Russell 2000, respectively. 

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