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Our latest Investment Outlook noted the prevailing forecast for the end of recession at the close of the third quarter and what that might mean for stocks. While we anticipate the return of expansion to the economy, we don’t view that as a reason to increase exposure to the market at this time. We’d reiterate our view that a smaller, slower economy will be emerging from this recession. To what level the economy recovers remains uncertain due to several factors, first and foremost being the trajectory of COVID-19 after summer’s end and secondly, the timing of the development and distribution of an effective vaccine. Until the latter occurs, the virus will still have a hand in charting a course for the economy regardless of the Fed’s best efforts.

That means, even though the recession appears to be ending in Q3, the economy isn’t out of the woods. A number of components within the economy have been hollowed out by the effect of the virus on human behavior. These are the hospitality and travel/leisure companies, stadium food services, bars/restaurants, health clubs, bricks and mortar retail, any enterprise dependent on people gathering or exposing themselves to others they don’t know. Millions, once working in those sectors are now unemployed. Without a vaccine or rapid-response testing, there will be a continuing deficit of confidence among consumers that will slow the recovery of these sectors even as the broader economy returns to expansion. Some collateral damage could extend to the banks and real estate developers/landlords that finance and rent to these businesses.

Time is the enemy of all as we enter into winter with the expectation of a surge in virus cases. If current conditions regarding the virus persist through year-end, we face the possibility of seeing a double-dip recession. Right now that’s a possibility, not a probability, but reason enough for us to stand pat at our current levels of market exposure. We’ll strive to optimize our exposure with a measured reallocation of capital from several high-priced, over-weighted issues to those more opportunistically valued.

These past couple of weeks, we’ve seen market volatility increase as investors took profits in some of the high-flying stocks that had been leading the market. Many have entered into correction territory (10% to 19% decline) while a few, notably Apple, Tesla, and DocuSign, retreated into bear territory (a decline of more than 20%) at their lowest ebb. It appears some of that capital is finding a home in companies with a proven track record and paying a dividend.

With November approaching, we’re offering our educated guess that the market has established its pre-election peak high. We expect to see the major indexes churn within a trading range, accompanied by a broadening of market leadership. This could prove to be healthy for stocks in the longer run IF the virus is contained and the economy remains on the expansion track. As of now, uncertainty reigns.

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