Exposure rates of the Dorval Asset Management Range – 4th September 2020

The severe correction on the Nasdaq – plummeting 5% on September 3 – and the sharp surge in Covid-19 numbers in Europe are the two features that stand out for the economy and the stock-markets in this post-summer period.

However, the risks of a bubble bursting on certain stocks and the virus’ resilience are offset by the ongoing world economic recovery, as well as further stimulus measures: these various factors advocate for clearly diversified equity portfolios, with a focus on the most cyclical sectors. 


The spectacular surge in share prices for new economy heavyweights, driven by solid 2Q results and small shareholders’ enthusiasm, has suffered its first setback since early June. This may be a simple blip for now (who can tell?), but there are signs of a speculative bubble i.e. valuations extrapolating past robust earnings growth, and the involvement of many individual investors, particularly in the United States. Over recent weeks, market momentum on the Nasdaq hit peaks witnessed only twice in recent history i.e. after the 1980-82 W-shaped recession, and during the massive 1999-2000 bubble (cf. chart 1). These excesses were particularly noticeable on the options market, which was dominated by some key stocks over the summer.



Extreme market momentum on the Nasdaq this summer
% difference between Nasdaq and its 200-day moving average


Most investors probably see the correction on the Nasdaq as a welcome shake-up for now: some will see it as a buy opportunity, while others – this includes us – view it as a good reason to diversify into stocks and sectors that have attracted lesser investment, including the most cyclical sectors. In any event, the macroeconomic context is upbeat for these investments.


Economic indicators since April have attested to a faster and more vigorous recovery than many forecasters had feared. China quickly recovered its momentum, with a positive effect for Asia in general, while in western markets, massive programs to shore up household income helped consumer spending recover greatly. For example in the United States, total consumption (goods and services) was down only 5% in July as compared with February’s figures (cf. chart 2), and with savings rates still double the normal figure, it looks very likely that the recovery in consumer spending will continue. An extension in support measures is currently being negotiated in Congress and should be finalized by the end of September.



Support for household income is the key factor in current recovery

$ bn / % of disposable income
US household disposable income
Spending on goods and services
US household savings rate


The same logic is playing out in Europe. Retail sales in Germany already stand above pre-crisis levels, while in France the recovery is also very discernible, albeit a bit weaker than for its European neighbor: French statistical agency INSEE calculated that savings rates for French households were close to 30% in the second quarter of the year, which is more than double the usual figure. Consumer spending should thus continue to catch up, particularly as more and more stimulus plans are announced.


However, a number of observers are concerned that the emerging second spike in the European epidemic will hamper this expected recovery. This risk admittedly exists, but in light of events in the United States over the summer, we can be reasonably optimistic. The outcome of this second surge in the epidemic in the US (cf. chart 3) is reassuring: the number of new cases has admittedly soared due to massive testing, but mortality rates were very low, due to the lower average age of new patients, among other factors. Additionally, the degree of economic disruption required to get the upsurge in the epidemic under control was reasonable and short-lived in the end. The number of job-seekers entitled to benefits has admittedly stopped falling and the increase in consumer spending was a bit smaller, but the overall economic recovery is not in jeopardy. Business surveys in August (Markit and ISM PMI) actually recovered substantially.



Number of new tests, cases and deaths, 7-day moving average in United States

Number of people tested
New coronavirus cases


Unless the epidemic takes an unexpected twist, the European stress test currently under way has a fair chance of ending up as a slightly difficult, but temporary, episode. We therefore think that it is important to maintain portfolios’ slant on sectors and stocks that are most exposed to the world economic cycle.


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