Investment strategies as the Dow hovers near 30,000

November 19, 2020

and Laura Kuntz

The Dow Jones Industrial Average1 nearly touched a record-breaking 30,000 points on Nov. 16, 2020, a psychologically significant milestone. The surge came on the heels of excellent preliminary news on COVID-19 vaccines by Pfizer and Moderna.

We sense that many clients feel a disconnect between high stock market indices and worries over COVID-19. It is vital to keep in mind — even with volatility along the way — that the stock market looks at least eight months in the future. By early summer 2021, warm weather and potential vaccine availability may begin lifting COVID. Pent-up demand for travel, dining and getting out may follow. Over time, businesses and the economy will rebound.

Effect of expected stimulus

While the stock market looks ahead, it also keeps one eye on current events, reacting to surprises. We believe the stock market is pricing in approximately $1 trillion of stimulus from the federal government by Jan. 30.

Jay Powell, Federal Reserve Chair, has pushed for a stimulus package, saying in October, “Too little support would lead to a weak recovery, creating unnecessary hardship for households and businesses.” A lagging recovery would also worsen existing inequalities, which Powell said would be “tragic.”2

Note that Mr. Powell did not say a lack of stimulus would result in no recovery. That view is key to our outlook that stock market and economic progress over time will largely be driven by the resolution of COVID, with additional stimulus along the way being a “very nice to have,” but not a must have for mid- to long-term investors.

Overweighting stocks

We are allowing clients’ stocks, as suitable, to run up to 5% higher than target. This is due to our bullish outlook over the coming 1-2 years, even as we face volatility and uncertainty along the way. This level of overweight can garner a noticeable benefit without, as suitable, undue risk.

There is a factor beyond COVID reduction that underlies our bullish outlook over 1-2 years: data about stock market upswings that follow downturns. As an example, if we review the last two downturns, we see that more than half the upswing came after stocks rebounded to previous highs.

In addition, we see potential in stocks that have not yet rebounded from COVID-induced lows, like travel, airlines and industrials.

Based on the potential in those stocks and our analysis of upswings, we believe there is attractive opportunity over time.

As always, please let us know your questions and your comments.


Definitions and sources
  1. The Dow Jones Industrial Average (DJIA) is an index that tracks 30 large, publicly-owned companies trading on the New York Stock Exchange (NYSE) and the NASDAQ.
  2. CBS News. Federal Reserve Chair Jerome Powell calls for more economic stimulus

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