For starters, I do believe we are in a much more optimistic place than what you may see in the media. At a glance, cases are down, hospitalizations are down, and unemployment is trending lower. Nearly 10% of the population has received the vaccine, corporate earnings have recovered, a new 1.9 trillion-dollar stimulus is ready to roll out, and maybe most importantly, there is a light at the end of this pandemic tunnel.
Quickly onto the investment universe… As I write this, nearly every major stock index is at or near their all-time highs. To some, this is quite astonishing when you think about where we were in March of 2020. It’s amazing to see where we are now, compared to what was expected. A recovery of this magnitude seemed very unlikely in March/April of last year. However, as I’ve mentioned in my prior writings, the stock market is a Leading Indicator! All of the good pieces of news that I included in the last paragraph are most likely already included in the current price of these equity indexes.
From here, we still remain constructively optimistic on the market/economy as a whole. We believe there is a ton of pent-up demand on the consumer side of things with families and business chomping at the bit to get back out and travel. With that being said, we’ve taken a little risk off the table across the board with the run up in equity prices as a tactical rebalance and to lock in gains. Stocks are relatively expensive right now. Many companies need to grow into where their share prices are trading right now. This is the only thing that keeps our return expectations slightly muted- from highly bullish (very excited) to bullish (optimistic).
One area we are keeping a watchful eye on right now is Fixed Income/Bonds. Returns over the next 5-10 years in this asset class may look very different than what you’re used to seeing. Interest rates are at all-time lows, which means it will be more difficult to get income from bonds. Generally, when interest rates are low, the lower the yield will be on your bond portfolio. While we believe that rates will remain low for quite some time, there is really only one direction for rates to go at this point… and that is higher. Initially this seems great, an increase in rates ultimately lead to increased bond yields which make them look more attractive. However, when interest rates increase, a large portion of the fixed income market will see a significant price decline.
With all of that being said, by no means are we claiming to abandon the asset class; however, we do believe you need to be mindful of what you own and the risk you’re taking on the fixed income side of things. For an investor to get the same income from a high-quality bond as they did 5-10 year ago, they must either take on duration by owning long term bonds, which will dramatically decrease in value as interest rates rise, or they must own riskier/high yield bonds, which don’t offer the same protection as higher quality bonds do and are actually correlated closely with stocks. In our portfolio’s, we want your bonds to provide you income, but also downside protection. If you’re taking too much risk or looking for too much yield, your portfolio could be vulnerable.
In closing, there is a lot to be positive about. There is finally a light at the end of the pandemic tunnel. With stocks at all time highs, now is a great opportunity to go back and asses your asset allocation based off of your goals and time horizon. As always don’t hesitate to reach out if you ever want a review/second opinion.