What we are seeing: In our view, it looks like we probably are going to be treading water for the balance of a long, hot summer. I don't see the market moving substantially higher from here, given current valuations and the lack of any milestones in front of us that might drive stocks upward overall. For the market to continue to move up from here, we also believe there needs to be broader market participation. Unfortunately, that doesn't look likely to occur.
I am also a little concerned that the market clearly has priced in a V-shaped recovery, without fully discounting the possibility of higher corporate taxes depending on the outcome of the US presidential election, which could be a drag on stocks longer term. As the summer progresses and we face significant uncertainty around the trajectory of the coronavirus and the US election, we believe the market is likely to show fatigue over the next couple months.
What we are doing: In the interim, our trading volume has slowed substantially. We see far fewer opportunities in the market than we did in March and April, when we were highly active. There may be better prospects moving into the fall.
We are generally sticking with the vast majority of high-quality1 portfolio holdings, which we expect to own throughout this cycle. Moreover, we think many high-quality businesses may take this chance to actually gain share and position themselves for the post-crisis environment.
What we are watching: We continue to analyze a number of short- and long-term factors regarding companies' growth prospects, structural soundness and ability to withstand a recession. This allows us to evaluate our current holdings and potentially add attractively priced, high-quality companies to our portfolios as opportunities arise. Our analysis is nuanced, but we are favoring well-capitalized businesses with intact value propositions.
Final word: Despite all this uncertainty, we do believe it is in times like this that our long-term investment horizon is of real value. While we don't know what is going to happen in the near term, we have much higher confidence that over the next several years the economy is going to normalize as a vaccine, treatment and herd immunity diminish the risk of COVID-19. We have high confidence that our high-quality companies are going to perform well in the meantime and reward investors over time.
Boston - Eaton Vance and its affiliates seek to actively capitalize on opportunities presented by uncertainty about future market and economic outcomes, while ensuring that the portfolio risk profile remains appropriate for the specific strategy. Here are excerpts from a recent conversation with Charles B. Reed, CFA, Portfolio Manager and Managing Director at Atlanta Capital Management.
1 Higher-quality companies typically have consistent earnings, strong balance sheets, significant free-cash-flow generation, growing revenues and meaningful competitive advantages, whereas the opposite is true for their lower-quality counterparts. Historically, high-quality equities have outperformed over full market cycles.