Investment Outlook and Strategy
The basic trend for the stock market is higher in sync with increasing economic activity and corporate profits, albeit with elevated investment risk. Topics worthy of mention are the virus, and our expectations for the economy, Fed policy, and the stock market.
COVID-19: While certain states and regions are experiencing an increase in virus cases, according to former FDA (Food and Drug Administration) Commissioner Dr. Scott Gottlieb, these increases are due to school re-openings, and higher levels of travel and mobility. Given the accelerating increase in the number of people being vaccinated, Dr. Gottlieb views a fourth wave as unlikely. Our view remains that we will reach herd immunity during the summer months (July to September).
The Economy: Expectations for economic growth to accelerate are fueled by the Fed, who remains committed to keeping short term interest rates pegged near zero for two to three years, and the federal government which, as they dole out trillions of dollars from past legislation, seeks more funds for other objectives. From an economic perspective, the stimulus from our government and central bank were required in 2020 to allow time for global economies to absorb and deal with the devastating shock inflicted by the COVID-19 virus. Our sense and concerns are that the spigots may stay open too long. When you consider that the economy was in a solid growth mode Pre-Covid with record low unemployment, if additional stimulus proves excessive then economic imbalances and inflation pressures are likely. This would put the Fed in a box, as too much of a good thing may not be a good thing.
The Stock Market: The primary factor impacting stock prices is the Fed’s low interest rate policies and actions. Interest rates are the bloodline for economies and the Fed has consistently conveyed the message that the spigots will remain open for another two or so years. At a higher level, global economies have huge sums of capital seeking rates of return and shares of companies that grow and reward stakeholders during these ever-changing times are attractive. Stated differently, stocks continue to compare favorably to securities and funds with low single digit returns and, in some countries, negative interest rates.
While we are true believers that owning shares of leading companies provides the best way of growing capital and protecting purchasing power, bonds have a definite place in portfolio management. Fixed income securities provide safety of assets, known rates of return, and ballast to client portfolios. While stock returns generally exceed fixed income investments over longer periods of time, stocks are only appropriate for risk capital that can withstand inevitable periods of market weakness.
Periodically, we remind ourselves of the math on investment returns – if the price of an asset declines by 20% then it requires a return of 25% to get back to even; if the decline is 50% then a return of 100% only gets one back to even. The main reasons against allocating more than normal amounts to stocks are that valuations are elevated and there are many developments that can cause a rapid repricing of assets lower. Putting it all together, we continue to manage accounts with a neutral asset allocation.