Last month, two generational trends reversed
. First, Federal Reserve policy shifted
from inflation fighting at all cost to tolerating above normal inflation. Materials, metals, mining, cyclical inflationary stocks, and interest rates have started to lift. Second, technology stocks peaked on September 2nd
, which mirrors the March 24th
, 2000 peak – a gap opening following a multiyear rise, extreme valuations, and classic market euphoria. These two powerful trend reversals have created sea change risks in the market that could significantly impact returns in the long term. Technology stock holdings and the S&P 500 should continue to be reduced and reallocated to inflationary cyclicals, value stocks, and cash.
Near term risks have also increased with the President’s COVID-19 diagnosis. While many investment professionals dismiss stock market risks associated with the Presidential election, we fear election consequences could have potentially large negative impacts on the stock market because of the market’s historically high valuations. One risk we fear is an undecided election, where historically high partisanship, violent extremism, uncertainty, and election-deciding legal cases could erode market confidence and faith in United States’ democratic institutions. This result will be exacerbated and cheered by adversarial nation states and anti-establishment extremists. Goldman Sachs has similar fears according to FINSUM “Goldman Sachs is stressed about the election. In particular, they are concerned about what a contested outcome could mean for stock prices…. Goldman is making it abundantly clear that they think most paths for the market lead lower—likely until the end of the year. With Trump now having COVID, that makes uncertainty even higher.”