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Portfolio > Portfolio Construction

4 Key Macro Factors to Watch on Our Road to Recovery

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As we head into the fourth quarter, making sense of the evolving macro environment is critical for advisors who are looking for opportunities to assess or rebalance their equity portfolios to set clients up for growth.

While initial jobless claims remain stubbornly high and industries such as entertainment and travel continue to struggle, I am still optimistic about our economic outlook. The recovery is uneven, but there are several bright spots on the horizon that are influencing my portfolio choices.

Here are 4 key macro factors I’m watching right now:

1. Mergers & Acquisitions Activity

To truly understand what’s happening in business and the economy, listening to what CEOs say is not enough — you have to watch what they are doing and how they are spending their capital.

The fact that so many are choosing to put their cash toward M&A, instead of hunkering down and saving it, means they are feeling more confident about the overall state of liquidity in the economy and envision opportunity in the foreseeable future.

Just look at the last few months: M&A activity skyrocketed in the summer, starting on July 6, with Warren Buffett’s nearly $10 billion acquisition of natural gas assets and debt from Dominion Energy Inc. Then, over the course of July and August, we saw $256 billion in M&A deals. In August alone, there were nine transactions announced worth over $5 billion — the highest number of M&A deals in any month in history.

While the upcoming election remains a wild card for corporate taxes, U.S.-China relations and other major market factors, the recent boost in M&A activity is a sure sign of better visibility and business confidence.

2. Manufacturing & Retail Sales Data

The manufacturing industry has seen a V-shaped recovery in the short term, but it’s interesting to note that the Federal Reserve of New York’s September Empire Manufacturing Index showed a 13.3-point monthly increase, to the second-highest level since November 2018.

In addition, the Federal Reserve Bank of Richmond Manufacturing Index reached a 2-year high and the Philadelphia Manufacturing Index posted its fourth consecutive monthly gain as well. These are important data points because the data is showing that we’re not just coming out of a low in March; manufacturing is accelerating from where it was two years ago.

I’m also seeing bright spots in retail sales. Nominal retail sales in the third quarter are on track to surge at a 61% sequential annualized rate, with real consumer spending up 37%. We have more than recouped retail sales from the March/April lows, and are on track to be above even the January pre-COVID crisis lows.

3. Copper as Economic Indicator

Copper, a “tell” on upcoming global growth, has showed notable strength in recent months, hitting a 36-month high recently, due in part to rebounding industrial demand in both the U.S. and China.

While we could see a potential pullback in copper prices over the next few weeks and months, the steady price increase since late March indicates that economic and manufacturing activity is picking up globally. And, it’s a sign that inflation expectations could be creeping up.

As an economic indicator for equities investors over the next 6-10 months, copper’s strength tells us two things: 1) We can expect to see growth and steadily improving profits into next year, and 2) the market isn’t as expensive as what people are saying, and there’s room to the upside.

4. Uneven Recovery Is an Opportunity

The recovery continues to be uneven, but understanding the fundamentals can point you to opportunities.

The entertainment and leisure industries — restaurants, hotels, gaming and other businesses — are still struggling to keep their heads above water as COVID shutdowns continue. At the same time, homebuilders are showing impressive strength, reporting strong demand for new builds across the country. Additionally, home improvement retailers are staying strong.

For advisors looking to optimize their portfolios, my view is that now is not the time for 60/40 allocations. With rates so low, bonds are clearly not the place for growth, but we will see the recovery reflected in certain equity market sectors.

The U.S. has the most aggressive fiscal and monetary policy in the world, so you’ll want exposure to U.S. equities, with diversification. I recommend sticking with a barbell approach, with a balance of secular growth such as tech, along with economically sensitive cyclical stocks such as industrials, mining and materials.

The total addressable market (TAM) in tech companies is noteworthy: The Internet of Things is set to be a trillion-dollar market in 10 years, SaaS cloud will be a trillion-dollar TAM by the end of the decade, wearables will be $55 billion within two years, and retail e-commerce – which was $3.5 trillion last year – is going to $6.5 trillion by 2023. I continue to focus on these and other secular trends in technology, such as the growth of 5G and data centers.

While the possibility of a second fiscal package is currently tied up in political posturing, the lackluster performance we’re seeing in the travel, leisure, entertainment and other industries makes me think the stimulus will come.

These are industries that struggle even in a bullish market, and as the pandemic has effectively neutered their business models for the foreseeable future, there are a lot of small- and medium-sized businesses that will not survive without a second stimulus. They need help, and I do think they will get it at some point, but the longer it takes to put together, the bigger the risk that our recovery will plateau.

Stephanie Link joined Hightower in June as chief investment strategist and portfolio manager. She leads Hightower’s Investment Solutions group, which provides outsourced chief investment officer (OCIO) services, model portfolios, separately management accounts (SMAs), investment research and due diligence for Hightower advisors. Prior to joining Hightower, Link was the senior managing director and head of global equities research at Nuveen. Follow Stephanie Link on Twitter: @Stephanie_Link


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