This has been an incredibly challenging year in many respects! Fortunately, some existing therapeutic drugs⁰¹ have proved beneficial to COVID-19 patients. The race is on for the development of a vaccine with several in Phase 3 clinical trials along with a recently approved saliva test are encouraging. The surge in Southern states⁰² and uptrend in the Mid-West⁰³ is weighing heavily on the reopening of the economy. Also, some university & college campuses are seeing a surge of COVID-19 cases⁰⁴ as are some European countries ⁰⁵.

       The economy is officially in a recession after a catastrophic 2^nd quarter decline of 32.9% in GDP⁰⁶ with enhanced unemployment benefits having expired  in August. New weekly jobless claims continue to decline, albeit somewhat helped from census hiring⁰⁷, but unemployment remains high⁰⁸. Without adequate small business relief, there may be a wave of small business bankruptcies⁰⁹ likely to keep unemployment claims stubbornly high. Being an election year, markets still anticipate another stimulative relief package!

       The Federal Reserve backstopped our economy and financial system¹⁰ with low interest rates and liquidity as needed to enable economic recovery. A slow growth economy with benign inflation will likely keep post pandemic interest rates lower for longer¹¹.  However, solvency issues that exist must be addressed with fiscal stimulus¹² through Congressional legislation. Unlike the Federal government, state and local governments CANNOT run deficits. Without another relief package, states and municipalities struggling from lost revenue and increased expenses from the COVID-19 surge may be forced to do service reductions and layoffs¹³.

       Tariff inflicted supply chain problems¹⁴ further exacerbated by COVID-19 have corporations rethinking supply chain sourcing between countries and possibly even continents. Corporations may also consider switching from just-in-time to just-in-case inventory¹⁵ to shun fragile business models¹⁶ as well as on-shoring some supply production domestically. Changes to the supply chain in regard to domestic production, will benefit factories and warehousing properties as well as increase employment associated with those activities. These changes will have long lasting implications but take time to implement.

       Online commerce and the virtual workplace have become more widely accepted, which benefits some properties while hurting others, such as office buildings and retail properties. Because the forced transition to a virtual workplace has gone relatively smoothly, some CEOs may evaluate the benefits & drawbacks¹⁷ of the virtual office with employees remotely working. Fortunately for landlords, Commercial Office space is usually under multi-year lease¹⁸ contracts, of five years or more on average, with cancellation penalty clauses. Vacancy rates may creep higher as leases come up for renewal¹⁹. However, if large companies go bankrupt en masse, which is NOT anticipated, that would quickly lead to increased vacancy rates¹⁸.

       There’s an obvious disconnect between Wall Street, which is booming, and Main Street that continues to languish. The S&P 500²⁰ cascaded lower for the fastest 30% decline²¹ in history only to be followed by a liquidity driven melt up with the biggest 100-trading day rise²² since 1933 from the meteoric rise²³ in a handful of stocks. Companies in sectors struggling as a result of COVID-19 have either cut or suspended dividends in an effort to preserve cash. Narrow breadth markets²⁴ like this tend to be fragile²⁵ and heavily influenced by factors like quarterly earnings and unexpected exogenous events. Where the market goes from here depends on future corporate earnings, speed of economic recovery and consumer confidence.

       The market recovery has favored the Healthcare, Media & Telecom and Technology sectors with growth stocks²⁶ outperforming value stocks by the widest margin in decades²⁷. In particular, large cap growth stocks are priced at idealistic valuations while small cap value stocks are priced at apocalyptic values²⁸. This discrepancy is somewhat explained by equipment upgrades and purchases for home office and remote learning. These sales bring future sales forward, representing higher current quarterly earnings possibly at the expense of future sales and lower quarterly earnings²⁹.  This event-driven purchasing pattern is very reminiscent of the Y2K upgrade cycle. However, the travel as well as entertainment and leisure industries may continue to languish for a while.

       With stimulus fading, election uncertainty, uncertain corporate earnings, complacency, & stretched valuations³⁰ : Caution is thewatchword! However, with pundits expecting the recession to end by late 2020 or early 2021³¹: We remain cautiously optimistic, especially given the expectations of a COVID-19 vaccine and new therapeutic drugs along with improved testing. A sustainable global economic recovery depends on consumer confidence and willingness to resume activities, especially given that COVID-19 will slowly fade away.

       Chance favors the prepared mind³²!  With the expected increase use of mail-in and absentee ballots, there may be a delay in the election results, possibly leading to a contested election. Irrespective of who’s elected, the next president confronts the daunting task of fixing the nation’s economy³³. If you have any concerns about volatility and/or valuations, a member of the Iron Belt Partners Team will gladly discuss those concerns with you. Our contact information is:

Lindsay M. Turchetta    lturchetta@wradvisors.com          (724) 493-9473

John D. Martin              JDMartin@wradvisors.com          (412) 925-7031

Working as a team in an effort to better serve our clients!

_{This communication is meant to be general in nature and should not be construed as investment or financial advice related to your personal situation. You should consult your tax, legal, and/or financial advisor prior to making any financial decisions.  The views expressed here are those of the authors, John Martin & Lindsay Turchetta, and not necessarily those of Waddell & Reed. Information is based on data gathered from what are believed to be reliable sources. The opinions, and other information contained in this article are subject to change continually and without notice of any kind. Forward-looking statements are subject to numerous assumptions, risks, and uncertainties, which change over time and may not come to pass. Past performance does not guarantee future results.}

_{Investments are not guaranteed and are subject to investment risk including the possible loss of principal.}

_{The index references herein are unmanaged and cannot be directly invested into. Past performance does not guarantee future results.}

_{⁰¹ Source: “FDA broadens emergency use authorization of Remdesivir” on FDA.gov}

_{⁰² Source: “Southern states report record coronavirus surges” on Politico.com by Jordan Muller}

_{⁰³ Source: “Coronavirus update: Infections are trending upward in the Midwest” on MSN.com by Washington Post}

_{⁰⁴ Source: “College campuses face explosion of COVID-19 cases” on nbcnews.com by Corky Siemaszko}

_{⁰⁵ Source: “Europe fears 2^nd Corona virus wave as cases surge” on Axios.com by Jacob Knutson}

_{⁰⁶ Source: “U.S. shrinks at record 32.9% pace in the 2^nd quarter” on financialplanning.com}

_{⁰⁷ Source: “Here’s where the jobs are – in one chart” on cnbc.com by Thomas Franck}

_{⁰⁸ Source: “New unemployment claims decline but remain alarmingly high” on nytimes.com by Patricia Cohen}

_{⁰⁹ Source: “A Tidal Wave of Bankruptcies Is Coming” on nytimes.com by Mary Williams Walsh}

_{¹⁰ Source: “FED to create emergency backstop for Commercial paper” on AmericanBanker.com by Hannah Lang}

_{¹¹ Source: “Post-Pandemic Interest Rates: Lower for Longer” on PIMCO.com by Joachim Fels}

_{¹² Source: “Liquidity vs. Solvency = Fed vs. Fiscal Stimulus” on MorganStanley.com by Jim Caron}

_{¹³ Source: “States, cities hemorrhage jobs” on Politico.com.com by Megan Cassella and Eleanor Mueller}

_{¹⁴ Source: “The United States Needs to Reshape Global Supply Chains” on foreignpolicy.com by Aaron Friedberg}

_{¹⁵ Source: “Just-in-time vs “just-in-case parts inventory management” on acumentfl.com}

_{¹⁶ Source: “Companies should shift from “just in time” to “just in case”” on ft.com}

_{¹⁷ Source: “Understanding the Pros and Cons of Virtual Office Spaces: Part 1 & Part 2” on stat.international}

_{¹⁸ Source: “What does COVID-19 mean for Commercial Real Estate?” on geophy.com by Nils Kok}

_{¹⁹ Source: “As Some Office Tenants’ Leases Expire, They Are Opting to Consolidate Locations” on nreionline.com by Patricia Kirk}

_{²⁰ The S&P 500 is an unmanaged index that cannot be directly invested into. Past performance does not guarantee future results.}

_{²¹ Source: “The Pros and Cons of Virtual Offices” on business.com}

_{²² Source: “The stock market hasn’t seen a 100-day gain this strong since 1933” on Marketwatch.com by William Watts}

_{²³ Source: “Market outlook: What’s next after a sharp fall and a meteoric rise” on business-standard.com by Deepsak Jasani}

_{²⁴ Source: “‘Narrow Market Breadth’ Could Kill the Stock Market Rally” on ccn.com by Sam Bourgi}

_{²⁵ Source: “BofA Warns of Volatility-Shock Risk Due to Market Fragility” on kiplinger.com by John Mowrey}

_{²⁶ Source: “A Few Big Stocks are Driving the Market’s Gains” on Barrons.com by Al Root}

_{²⁷ Source: “Value vs. Growth valuations blow out in 2020” on pionline.com by Charles McGrath}

_{²⁸ Source: “Small Cap Value Stocks – This time things are not different” on bloomberg.com by Joanna Ossinger}

_{²⁹ Source: “Here’s how far corporate profits could plummet in 2020” on Fortune.com by Shawn Tully}

_{³⁰ Source: “The Stock Market is Overbought and Complacency is Very High” on seekingalpha.com}

_{³¹ Source: “U.S. Recession Likely to End Late 2020 or 2021, NABE Survey Says” on bloombergquint.com by Maeve Sheehey}

_{³² Source: “Chance favors the prepared mind” quote by Louis  Pasture}

_{³³ Source: “What will determine a new stimulus plan” on bgr.com by Andy Meek}