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Better virus-related data along with an enhanced understanding of COVID-19 and treatment options contributed to better economic conditions despite the rise in new cases. Virus-related closures have been limited, and unprecedented fiscal and monetary measures are providing much-needed support in the recovery. As a result, a wide range of asset classes produced strong results for the month of July.

However, fiscal and monetary coordination to provide massive stimulus to economies around the world has increased concern on the sustainability of high government budget deficits. In this issue of Key Investment Perspectives, we analyze the impact of deficits to better understand the effect of government spending on businesses and households. We pay particular attention to the unique perspective afforded by Modern Monetary Theory — a new and somewhat controversial economic philosophy — and the insights it offers in the current environment.

Key Takeaways

  • Global Equities: The Russell 3000 Index increased 5.7%, led by mega cap stocks and growth-oriented sectors. For 2020, growth stocks are up 18.3% versus value stocks that are down 13%, resulting in an unprecedented performance gap. Earnings season has been positive as S&P 500 companies delivered upside surprises of 22% relative to expectations. Developed international equities increased 3.1% and emerging markets soared 8.9%.
  • Fixed Income: Domestic fixed income markets generated strong gains in July. The Bloomberg Barclays Aggregate Bond Index increased 1.5% for the month, while lower yields across the curve led to strong gains in US Treasuries. Municipals continued their rally, while improving economic trends and direct Fed intervention resulted in continued gains in corporate credit.
  • Tactical Allocation: We increased our equity allocation to neutral to reflect the improvement in economic trends and reduced risk of a further sharp sell-off. Within equities, we favor the US compared with developed international, and we prefer investment-grade corporate bonds over Treasuries in fixed income allocations. We continue to emphasize alternative investments for suitable clients, especially in light of low bond yields and reduced portfolio diversification benefits.