This has been a year of uncertainties, but we can say with confidence that the 2020 election and promising news on the COVID-19 front will have implications on the equity and fixed income markets. We also know that political neutrality is fundamental in assessing risks and opportunities in the financial markets moving forward.
With those realities in mind, I seek out opinions and strategies from other experienced investors. Attendees of our November 18 webinar had the opportunity to hear from two such experts—investment managers from PGIM and T. Rowe Price, whose opinions factor into our current portfolio design. We are largely aligned in our thinking about the markets over the next 18 to 24 months, and below are our four key takeaways from the webinar.
A divided government has many implications
President-elect Joe Biden will lead a divided government if, as many predict, the Republicans keep control of the Senate after the Georgia U.S. Senate runoff elections on January 5, 2021.
It is likely, then, that any fiscal stimulus packages proposed by the Biden Administration could be caught up in political wrangling or have a lower total spend than if the Democrats controlled both houses of Congress. With less stimulus, the unemployment rate could take longer to tick down, and consumers could have less discretionary income to spend.
The Federal Reserve is likely to keep rates low, and we believe investors need to look beyond U.S. government debt if they require higher yields, especially for current income. Corporate debt may be an important component of a bond portfolio over the next few years, especially if US interest rates remain low.
Meanwhile, with a divided government, corporate tax rates might also stay low. Coupled with low interest rates, companies may have higher free cash flow, which could be good for growth.
Companies that became COVID losers can be winners again
The pandemic has dealt big blows to sectors like aerospace and hospitality, but we believe many companies will regain more normalized earnings as the effects of the pandemic wane. We also agree that financials, including some of the big banks, may provide a solid investing opportunity, as they are still inexpensive relative to many other stocks, have high reserves and have significant excess capital.
Despite the uncertainty of our COVID-19 reality, a solid economic recovery is emerging, and we can foresee evolving opportunities in both the stock and bond markets as the recovery continues.
Value stocks have become more attractive
Growth stocks have unquestionably outperformed value stocks over the past decade, but that may be changing. Many value names can benefit from the dynamics we expect in a recovering economy over the coming years, especially those stocks in poor-performing sectors like energy and finance.
Of course, as we regularly tell clients, it’s critical to diversify portfolios. We anticipate maintaining a healthy allocation to both growth and value stocks, with an emphasis on the areas where we see opportunities.
The technology sector offers potential pitfalls and rewards
Technology has a significant impact on how we live and work, so it’s tempting to think that technology stocks and bonds are always good bets. However, like stocks and bonds in other sectors, an investment in technology should be nuanced and deserves thoughtful consideration as we move through the next stage of recovery.
As an example, one expert noted that it is important to consider not only how well a company pays over a period like 30 years, but also how likely it is that its technology will change dramatically over the same time period. We agree it’s essential to do your research before investing in even revered names.
If you have any questions about these insights or would like to learn more about our investment and portfolio design process, please email us at firstname.lastname@example.org.