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Current outlook, portfolio strategy

By IAN N. BREUSCH - | Oct 26, 2020


Global capital markets continued to rally through much of the third quarter, rebounding from the March lows we experienced when investors aggressively sold assets in response to the significant unknowns related to coronavirus (COVID-19). Clearly, investors have responded to the swift and aggressive actions taken by major central banks and governments all over the world. The monetary and fiscal stimulus was substantial enough that investors were willing to purchase assets now with an eye towards a future economic recovery, which most believe will not be in full swing until a vaccine is widely distributed. Although we believe COVID-19 will continue to weigh on economic activity until a vaccine is approved and disseminated, we have undoubtedly made substantial economic progress since our self-imposed shutdown.

At the latest meeting in September, the Federal Reserve Board announced its intention to keep the federal funds rate at the current level (0-0.25 percent) for the foreseeable future. In fact, the voting members of the Federal Open Market Committee (FOMC) almost unanimously agreed that rates will stay in this range through 2023. Moreover, they intend to keep rates low until maximum employment is achieved and inflation has risen to 2 percent and is on track to moderately exceed 2 percent for some time. The fed will also continue to purchase Treasury bonds and agency mortgage-backed securities to sustain market functioning and help support the flow of credit. The aforementioned fed policies, coupled with a willingness by Congress and the president to pass another relief package at some point (before or after the election), does indeed create one of the most accommodative environments we have ever experienced.

The upcoming U.S. elections in November are quickly approaching. Given the constant rhetoric from the two primary political parties, it is easy to lose sight of what really matters to successful long-term investing. We remain adamant that meaningful shifts in portfolios need not be made because of who controls the White House or Congress. While we may experience some short-term volatility around the election itself, don’t make the mistake of over emphasizing politics when making investment decisions. There are simply more important things to consider such as:

– Your own long-term goals and constraints

– Fundamental characteristics of asset classes and individual investments

– Valuation levels across asset classes and individual investments

– Underlying economic landscape

Given the backdrop of continued economic weakness related to COVID-19 (albeit slowly improving), and unprecedented fiscal and monetary stimulus, we will remain methodical in our investment approach. We will focus on the things we can control, such as asset allocation among high-quality stocks, bonds and cash, as well as our ongoing research efforts. Our research process will continue to emphasize high-quality investments trading at attractive prices relative to the overall opportunity set. These efforts are most meaningful to ensure we continue to achieve (and hopefully exceed) long-term investment goals. Given the amount of speculation we are seeing in certain areas of the stock market, we believe it is more important than ever to be mindful of company fundamentals when making investment decisions. To the extent fixed-income securities (bonds) are appropriate, we are intentionally favoring shorter-term bonds with good credit quality. Interest rates will remain historically low for the foreseeable future, diminishing expected returns for most bond investors.

Ian N. Breusch is the chief investment officer for The Sanibel Captiva Trust Company.