First quarter outlook, portfolio strategy
This past year will undoubtedly be remembered for the global COVID-19 pandemic and its impact on the global economy and capital markets. As we close out 2020 and look forward to a new year, we remain mired in the pandemic, but with a renewed sense of hope and optimism, as the first vaccines are being distributed here in the United States. Frankly, the vaccine developments over the past few months have been crucial for investors and consumer confidence at large. We have viewed a vaccine as the ultimate solution to the pandemic, and it looks as though several will emerge as viable options — an amazing scientific achievement to say the least.
In early November, Pfizer and BioNTech were the first to announce promising efficacy rates (more than 90 percent) for their COVID-19 vaccine candidate. Moderna followed shortly thereafter with similar results using similar technology. Markets reacted very positively, and we began to see a broadening in the market rally that began in late March. For several months we have been highlighting the dispersion between growth and value stocks. Much of this dispersion was the result of technology-related companies (and other nascent businesses) profiting directly from the pandemic and the stay-at-home/work-at-home environment. The vaccine provided a clear path forward for the more traditional businesses that languished during the pandemic.
Global capital markets continue to perform rather well despite the backdrop of current economic malaise. Investors continue to look toward the expected improvement in economic activity in 2021, instead of focusing solely on the current environment, which remains challenged. Economic activity was significantly curtailed earlier this year, but worst-case scenarios were largely avoided, thanks in part to the aggressive and timely action by the Federal Reserve Board and Congress to provide economic stimulus. With more fiscal stimulus likely, alongside exceedingly accommodative Federal Reserve interest rate policies, we are optimistic as we head into 2021. Over the next few months, we expect renewed pressure on unemployment as local cities and states enact new policies to reduce the spread of COVID-19. As we move closer to spring and summer, a strong resurgence in employment, consumer spending, and corporate earnings is expected to start taking shape.
With interest rates likely to remain exceedingly low, fixed income (bonds) remains a safe-haven asset, but with limited upside potential going forward. If interest rates fall farther, near-term prices will certainly rise across the fixed-income landscape. However, given the amount of fiscal and monetary stimulus made available across the world, we believe there is a greater likelihood that interest rates move higher, not lower, causing bond prices eventually to fall. To be clear, the risk of rising interest rates for now is rather subdued. To the extent bonds are appropriate, we are intentionally favoring shorter-term bonds with good credit quality.
From a stock market perspective, we believe it makes sense for investors to have a mix of both growth and value stocks that are reasonably well diversified across various sectors of the economy. However, we continue to find good values among many dividend-paying companies in particular. Income-producing stocks have largely been ignored by market participants over the past several years — a trend that only increased during the pandemic. However, with a low interest rate environment and a return to “economic normalcy,” these sorts of companies should perform rather well in the months and years ahead.
Ian N. Breusch is the chief investment officer for The Sanibel Captiva Trust Company.