Where has the time gone? Like a flash, one-twelfth of the new year has passed. It feels like we are still taking stock of the bull-market in everything that was 2019 in which nobody seemed to believe. Believe it or not, here we sit with bond yields about 40% lower and equity valuations about 20% higher than they were one year ago. For all of the negative news headlines that made us nervous, only one brick in our wall of worry mattered – the Fed. As the Fed stepped back from tightening, asset values started their climb and they hardly looked back.
The first month of 2020 has been no slouch. From military strikes and Iranian tension, to US Presidential impeachment, to fear of a viral pandemic, to a list of human tragedies, the world continues to sit on edge.
With interest rates falling and yet another yield curve inversion, the equity markets are looking for a reason to sell in the short term. This week, the Fed stayed on hold but made a modest indication of slowing their bond purchases which have supported liquidity in the money markets but perhaps has leaked over to risk assets. The Fed’s stance remains an important foundation to this market. Rightly or wrongly, the market still believes in central bank omnipotence despite the policy maker’s clear messages otherwise.
It won’t be long now until the Democratic nominee for the general election will be known. It remains too early to say much, but Senator Sanders is slowly pulling away from the pack in the early primary odds. With institutional asset manager polls showing overwhelming confidence of a Trump re-election (> 80%), the nomination of a candidate with more trans-formative fiscal policies could trigger some asset re-pricing with shifting expectations.
With all of the excitement and action in the world, we remain boringly consistent with last year’s game plan. Stay invested but stick with quality – focus on growing cash flow streams that are dependable and as fairly valued as you can find in a stubbornly low interest rate world. We have tactical views at the margin of where those are, but our strategy is the same. In this approach, we are prepared to participate should the future hold upside, protect when it shows downside, and preserve real value when the passing of time becomes value’s friend.
Will Skeean, CFA
Partner – Investment Management Team Chair