I reject the term “unprecedented times”. It seems that we are too often told that we are living in unprecedented times, that we should accept a new paradigm for the era, pretend that plague has never been visited upon humanity, and this is the most vicious election the US has ever been through. I say Poppycock!
Readers of history would know a hundred years ago the Spanish Flu killed over 50 million people in a substantially smaller world than today. It possessed a much higher mortality rate than the current pandemic and occurred during the “war to end all wars.” On a macroeconomic level, what we are dealing with today is much less disruptive than that dark time.
Further, if anyone believes that this is the most divisive era in American politics, I suggest they take a break from the hyper-partisan pundits and recall that there have been many divisive eras in our political history and that we have come through those periods to steadier times.
These are assuredly trying times (maybe the most trying of our lifetimes). But, no matter the 24/7 news cycle, the world is not at its end. We will come out the other side.
Markets Tell a Different Story
Equity markets have delivered a strong recovery amid the gloom. Markets in their unseen ways are often more insightful than any human pundit. They operate like a giant supercomputer driven by thousands of small decisions every second, encompassing data and projections from around the globe. They are delivering a different message and reminding investors that it is best to be in the market over the long term. It is futile to try and predict the direction of changing winds. Heck, not even the weatherman can get it right more than a day or so (or less) into the future. I regret all the golf rounds I skipped because of a false forecast.
We remain optimistic (though masked) for a number of reasons. 1) We started the year with a robust economy at full employment. 2) Dismal economic forecasts have been consistently bested by actual results, and there are reasons to believe the trend may continue. 3) A growing number of vaccines are in final trials and will quickly be in production pursuant to approval. Once vaccines are deployed, many businesses, and jobs that are now in a COVID quarantine will be again up and running.
That is the message of the markets. Enterprise will find a way, and in many ways a crisis spurs innovation (remote work and video conferencing) while accelerating the forces of creative destruction (the death of malls). I think it is safe to say we have accelerated the science of healthcare delivery (telemedicine), and furthered knowledge of virology and epidemiology. The experience will serve us well when the next bug appears, as it inevitably will.
My favorite coping mechanism during turbulent times? Switch the channel (especially when the political ads come on), enjoy a good book, and focus on the long term.
A Serious Problem with Bonds
It has become clear the relationship of fixed income assets as a diversifying balance to equities is all but dead. Interest rates will remain lower for longer (per the Federal Reserve Bank), even as they inject Trillions into the economy.
Two interesting statistics from one of our fund providers:
1) 86 % of bonds globally yield less than 2%.
2) 413 equities out of the S&P500 yield more in dividends than the 10 Year US Treasury Bond.
For some time, we have maintained the view that bonds are providing insufficient compensation commensurate to their risk. If interest rates rise due to any external shock your principal will be seriously impacted. Fed efforts to keep rates low in this case should eventually deliver inflation, and further erode the value of your principal. This is a delicate balance the Fed has cornered itself into.
The worst of this is that government deficits are exploding upward, with no end in sight, no matter who wins the election. The real issues to be concerned with are: how long this can go on; what is the end game; what can we do to protect the portfolio; and how does this affect your financial plan.
Apart from cash, short-term bonds, and a very few alternative investments, a portfolio manager is driven to own equities. Rewards can only be obtained by taking on risk, and bonds aren’t compensating investors for risk. This is strong driver for the continued overvalued equity markets, and especially growth stock momentum. Real assets, as represented by growing corporate earnings streams represent not only income but also serve as an inflation hedge.
At this point in a multi-decade trend of lower global interest rates, we believe equities are simply the best game in town, and cash earns nothing.
The Sector Roll
The economy is undergoing change which will continue to disrupt the world in which we live. Remote learning is shaking up the education industrial complex, and telemedicine will increase accessibility to while reducing the cost of healthcare delivery. The internet and automation are redefining logistics and should continue to eliminate malls and many retail businesses. Pier 1 may have gone bankrupt but is set to re-emerge as an internet-only based company run by a firm that bought their intellectual property.
One could go on and on, but we believe the inevitable forces of technology and demographics will propel these changes, and we will continue to invest for the future.
Chaos creates opportunity. We just need to ride the waves…and invest well.