Heading into Halftime, Stick with Orange Slices

As of July 13, 2020

Brian Collins, CIO, Harbor Capital Advisors, Inc.

Optimal Game Time Habits

Back in the day, the halftime break in professional sports often meant salt tablets, water, and an occasional cigarette. While not the picture of health one expects from athletes, this was the norm. During his rookie year, Michael Jordan was surprised to see some of his veteran teammates smoking during halftime. This activity would have never occurred during his college days at the University of North Carolina. Always looking for an edge, Jordan heard that hockey players ate orange slices during their in-game breaks as a quick way to replenish energy. He decided that his teammates would benefit from less smoking and more orange slices. Now, locker rooms are filled with all types of energy bars, gels, sports drinks, and a few orange slices to reenergize the players as they head out to play the second half of the game.

Get to Halftime to Reset, Recharge, and Make Adjustments

Investors are craving a halftime break this year. In addition to the “normal” challenges of daily life, we have dealt with:

  • Natural disasters
  • Geopolitical stress
  • Growing divisiveness about race and socioeconomics, and
  • Continued wide gaps in economic growth and opportunity

Any one of these is more than enough to make investors want to take a timeout, without the enormous impacts of the COVID-19 pandemic on markets, economies, and people. It is even more surprising that anyone wants to go back out for the second half, no matter how many orange slices they have consumed. The strong bounce back of the S&P 500 in the second quarter provides some optimism that the second half may be better than the first. However, there are enough big questions lingering that this optimism is cautious at best.

In addition to allowing athletes a chance to reenergize, halftime provides coaches an opportunity to adjust game plans based on what was or what wasn’t working in the first half. The coaches also share what they expect the opposition to do in the second half. These in-game adjustments can be crucial to the outcome. Many of the great coaches are known for their ability to adapt and respond while adhering to the systems that they have developed over many seasons. Finding the right balance between the two is critical to many coaches’ long-term success.

Coming off the best quarter for the S&P 500 since Q4 1998, it would be easy to think that the second half could be a continuation of this positive momentum. However, it’s important to recall that Q1 2020 was the worst quarter for the S&P 500 since Q4 2000. The result is the first negative six-month period for the S&P 500 Index since 2010 and only the seventh negative first half in the last 21 years. How likely is a comeback? In two of the prior six occurrences, the second half performance was strong enough to overcome the first half deficit and deliver a positive calendar year. The other four occurrences happened in the post-TMT (technology, media, telecommunications) bubble period of 2001-2003 and in the GFC (Global Financial Crisis) of 2008. We believe a positive S&P 500 return for 2020 is uncertain and halftime adjustments are likely needed for investors to have a chance for a winning year.

Unlike Previous Games, There Are More Headwinds Entering This Second Half

We also believe there are many unknowns that investors will have to face, all with a significant impact on second half and full year results:

  • Response to COVID-19 spread and potential vaccine development
    • Much of the equity market recovery was driven by optimism that the curve had been flattened and progress was being made on vaccines. As observed in June, equity markets reacted negatively to indications that infections were on the rise or that early vaccine studies showed lower efficacy levels than anticipated. This optimistic/pessimistic cycle is likely to persist throughout the rest of 2020.
  • Impact of initial fiscal and monetary stimulus
    • After governments and central banks acted in late March to stop the sharp collapses around the globe, markets reacted very favorably. As has often been the case after the initial surge, questions were raised about what and how much more will be done. With strong views in favor and against more actions, there is a reasonable likelihood that both sides of this debate will end up disappointed.
  • Speed and level of economic recovery
    • As a result of the stimulus and other positive signs, many forecasters started to predict a more rapid economic recovery. The equity markets may be showing a V-shaped rebound. However, conflicting signals from a variety of economic indicators point to a slower, more prolonged period of no/slower growth that may not return the economy to levels prior to COVID-19 for many quarters.
  • Increasing geopolitical tensions in the U.S. and abroad
    • Election years are known for their short-term volatility as momentum shifts based on the latest polling figures along with the changing expectations and actions from the next administration. While many eyes will be on the U.S., of great importance will be how the geopolitical issues in the Far East play out. China’s recovery was faster than many expected but we believe given its role in global supply chains, China’s future growth will be impacted by the pace of recovery around the globe.

In addition to these macro-level challenges, investors are faced with additional questions that are likely to impact their portfolios in the coming months:

  • Will U.S. growth stocks continue to drive overall market performance? Will there be a point at which valuations become too stretched without fundamental support, leading to a sell-off that brings down the broader market?
  • Related to the above, will investors start to look at value stocks again as valuations remain low and positive economic signals may spark another rally?
  • If the U.S. enters a second wave of the pandemic, will investors turn to overseas markets where the pandemic appears to be better contained and economic growth may improve?
  • With U.S. rates expected to be at extreme lows for the foreseeable future, where will investors look for yield and income?

Good Coaching, Talent, Skill, and Time Management Can Help Secure a Win

After some orange slices or perhaps a few smokes during the halftime break, what types of adjustments should investors be thinking about? While the next six months are likely to be volatile and may present challenges, there will be opportunities to pursue by adjusting the game plan and looking at exposures to different market segments. Investors will need to determine how the challenges and opportunities align with their long-term game plan. Tactical shifts may add value but could cause portfolios to deviate further from long-term asset allocation targets. It can be challenging in these periods to determine if going on offense or playing defense is best. In a recent informal survey of Harbor’s subadvisers, there were mixed responses to these issues. While fixed income managers were more likely to tactically add risk exposure over the next six to twelve months, equity managers were more cautious. This may be the result of many equity portfolios being near the upper end of their risk comfort levels after the strong bounce during the second quarter.

At Harbor, we believe investors should evaluate these decisions within the context of a longer-term investment plan. We think tactical adjustments can be prudent when those adjustments are carried out by experienced active investment managers in accordance with a longer-term investment strategy. We believe that our skilled managers who understand the risk reward tradeoffs of these opportunities will seek to deliver attractive returns for investors, particularly in more volatile market environments. Like the great coaches who make the needed halftime adjustments that are critical to success in the remainder of the game, we expect our subadviser partners to assess the situation and rely on their skills and experience as they seek to deliver for our shareholders. Though we are cautiously optimistic about how the remainder of 2020 will play out as we exit the locker room, we are extremely confident that our coaches have made the necessary adjustments to do everything they can to secure the win on behalf of our investors.

Legal Disclosures

Past performance is no guarantee of future results.

The information shown relates to the past. Past performance is not a guide to the future. The value of an investment can go down as well as up. Investing involves risks including loss of principal.

The views expressed herein are those of Harbor Capital Advisors, Inc. investment professionals at the time the comments were made. They may not be reflective of their current opinions, are subject to change without prior notice, and should not be considered investment advice.

The S&P 500 Index is an unmanaged index generally representative of the U.S. market for large capitalization equities. This unmanaged index does not reflect fees and expenses and is not available for direct investment.

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