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Cracks In The US Outperformance Trend

September 2020

At the time of writing, the S&P 500 Index is up approximately 7% year-to-date (in $USD terms), after having been down as much as 30% during the COVID-19 meltdown in late March. A swift recovery may be intuitive, given prompt and forceful fiscal and monetary responses implemented to offset lockdown measures. But with new US coronavirus cases still over 40,000 each day, a November federal election on the horizon and performance dominated by a handful of companies, has the US stock market gotten ahead of itself? Action over the last week would suggest so, as the stock market has come under strong pressure.

To be fair, the US is no longer the world’s top COVID-19 hotspot (this dubious distinction now belongs to India which currently has over 90,000 new daily cases). But this is a small consolation, as the reputation of the US as a global healthcare leader has been badly tarnished and the country is still struggling to contain the spread of the virus. Most important to the stock market is the risk of renewed lockdowns and their corresponding hit to economic activity. While the US has become more accustomed to and proficient at managing the virus from a treatment and public health perspective, the elevated caseload presents a major disadvantage vis-à-vis other major countries and regions who have already curtailed transmission rates.

The upcoming presidential election, slated for November 3rd, promises to be another polarizing affair. As the vitriol intensifies and poll-watching becomes a national pastime, investor attention will be increasingly drawn to the race. On the surface, Trump is seen as the more pro-business candidate, having cut corporate tax rates markedly in late 2017. Financial markets worry that a Biden presidency would see a reversal to a more cumbersome corporate tax regime. But this is a major oversimplification. Firstly, Biden would be hard pressed to push for policies that make life more difficult for businesses struggling to recover from lockdown measures. Additionally, the business climate in the US would likely benefit under Biden, who would almost certainly be less erratic and unpredictable in his decision-making and communication style. The key takeaways are that there is no clear-cut “market friendly” candidate and volatility in the US stock market is likely to rise as the election draws nearer.

The so-called “FAANG” stocks have carried US equity performance year-to-date. Per the chart below, this collection of technology-oriented megacap stocks are up an eye-watering 72% on the year; outperforming the broad market by 65%. This staggering divergence could be interpreted in numerous ways. The more constructive view would be that excluding the FAANGs, US stocks have not meaningfully participated in the rally and still have upside potential. The less encouraging view would be that while the FAANG stocks have indeed been “winners” through the pandemic, there is now considerable vulnerability as the group has been bid up to lofty valuations.

Irrespective of recent volatility and the challenges noted above, investors may well continue to feel emboldened by accommodative policy and drive US stocks higher. Furthermore, with most US treasuries trading at negative real yields, a widespread move up the risk curve into corporate bonds and equities is likely to continue over the medium-term. For these reasons, we do not have an outright bearish view on the US market. But policy support and unpalatable bond yields are hardly an American phenomenon. We see better opportunities in European and Asian stocks which also benefit from abundant global liquidity, have flattened the spread of COVID-19 and trade on less demanding valuations. 



The euro has appreciated recently against most major currencies as the approval of the EU recovery package helped alleviate both economic and geopolitical risk. We see less upside potential from current levels, but remain unhedged on euro-denominated asset class exposures to help broaden portfolio diversification.  


US treasuries have joined their developed market peers; guaranteeing losses (on an inflation-adjusted basis) if held to maturity. With positive real yields and significant fiscal and monetary support, we expect US corporate bonds to remain well bid. We reiterate our US credit overweight.


Recent US equity performance has lacked sufficient breath; being dominated by a handful of bellwether technology-centric companies. With COVID-19 transmission rates still elevated, a disruptive pre-election environment and ample global liquidity, we see better prospects for regions outside of the US and remain underweight US stocks.


As the global economy recovers from a severe demand shock brought on by unprecedented lockdown measures, oversold cyclical asset classes have the potential for a period of “catch-up” outperformance. Pushed forward Chinese infrastructure project demand, low interest rates and a weak US dollar were key facets in our decision to add global metals and mining stocks to client portfolios.


Gross-of-fees performance ($CAD) as of August 31, 2020. Returns for periods greater than 1 year are annualized.
Performance statistics for ETF Managed Portfolios are calculated from documented actual investment strategies as set by Forstrong’s Investment Committee and applied to its portfolios mandates, and are intended to provide an approximation of composite results for separately managed accounts. Actual performance of individual separate accounts may vary with average gross “composite” performance statistics presented here due to client-specific portfolio differences with respect to size, inflow/outflow history, and inception dates, as well as intra-day market volatilities versus daily closing prices. Performance numbers are net of total ETF expense ratios and custody fees, but before withholding taxes, transaction costs and other investment management and advisor fees. Past performance is no indication of future results. A rate of return for one year or less is not annualized.

David Kletz

Vice President, Portfolio Manager

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