After a strong start to the week, the market tapered off to close roughly in-line with last Friday. With a second stimulus package still elusive, participants look reluctant to push the market to a new all-time high. This choppy condition could persist with the election right around the corner. Still, we continue to believe the conditions are ripe for the bull market to continue over the next year. The Fed and Treasury are combining forces to provide a powerful backdrop for the market. The fed offers almost infinite liquidity and the Treasury the promise of higher spending over the near future. Together, this has been enough to propel the market through the uncertainty of the pandemic, and we suspect this to continue. To that end, despite a soft week for the overall market, we believe a significant cyclical turn is taking place under the surface. The outperformance of stocks like Caterpillar and GM is perhaps foretelling of what lies ahead.
We also got our first glimpse into Q3 earnings this week. The banks surprised to the upside as they provisioned far lower amounts for credit losses. In addition, we continued to see robust home loan demand. We take this as a sign that consumers and businesses are holding up better than was imagined just a few months ago. The strength of the housing market is nothing short of remarkable, all things considered. Though banks are certainly benefiting from the boom in mortgage underwriting, low-interest rates continue to make the lending environment difficult, and the market continues to shun the group. The sequential improvement in financial institutions has been more meaningful for other cyclical groups like discretionary, industrials, materials, and tech. Improvement in the broad economy from the COVID-19 lows and the promise of more stimulus money have these names on the move. We think it is important to respect this momentum.
With the election less than a month away, the polls have moved strongly in favor of Biden. In support of the polls, stocks levered to a Trump victory continue to significantly underperform those levered to Biden. The broad market is not moving in a way consistent with an incumbent loss, but it is difficult to say this is a function of the election with so many complicating factors. We tend to view individual stocks and industries as more telling. Still, we are preparing for a variety of potential outcomes. It is a good time to have a bunch of stocks that can be bought once the outcome is known. For us, we see particular value building in defense and health care stocks. Both have been sold over the last couple of months, but we believe they present long-term growth opportunities regardless of the administration. We've got a close eye on these sectors.
Preston May, CBE®
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This report was prepared by Donaldson Capital Management, LLC, a federally registered investment adviser under the Investment Advisers Act of 1940. Registration as an investment adviser does not imply a certain level of skill or training. The oral and written communications of an adviser provide you with information about which you determine to hire or retain an adviser. Information in these materials are from sources Donaldson Capital Management, LLC deems reliable, however we do not attest to their accuracy.
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