A successful investor today must be forward-focused, weighing many things: federal and government policies, the arrival of therapeutics and vaccines, the election, our economy, the global economies, international politics, interest rates, corporate profitability, and the stock market. Whew! We are living during a period of historic change that will create new opportunitiesâones we hadnât anticipated before the world changed.
We need a vaccine to unlock the global economy. Fortunately, news on that front is getting better each week. We have at least three companies that will complete Phase 3 testing this fall and be available on a limited basis before year-end. This is in addition to having access to billions of doses worldwide before the end of 2021 supplied by many great pharmaceutical companies like [[JNJ]]. In the interim, it appears that the use of masks social distancing, and contact tracing is finally being accepted which will mitigate the spread of the virus.
The Fed will keep rates near zero and provide all the liquidity that the economy needs to get over the hump. We take Powell at his word that the Fed has many more tools at their disposal to support the economy that will keep negative rates are off the table. Remember that liquidity drives the financial markets and as long as the supply of liquidity is exceeding the need by the real economy, it will not only support the financial markets but also force investors further out on the risk curve. We continue to favor equities, industrial commodities, and gold over bonds.
We are disappointed by our governmentâs inability to pass a new stimulus program to replace the expired Cares Act. Notwithstanding, we expect one to be agreed to soon as pressure builds each day. Thirty million citizens will fail to get added benefits and businesses will close each day if they don't come together soon.
We have begun to focus on the election. We do not expect either party to act in a way that could jeopardize the economy, a least until it is on a firm footing, which most likely will not be before the end of 2022 after all of us are or can be vaccinated.
The U.S economy had a quick restart as states reopened in May but slowed down due to outbreaks in a few states. However, economic growth may already be re-accelerating as the number of new cases has peaked; the death rate is declining; masks and social distancing guidelines are being adhered t; and testing and contact tracing are increasing.
Unemployment claims fell to 1.19 million last week down 249,000 from the prior week. We were pleasantly surprised that employers added 1.8 million jobs in July; the unemployment rate fell to 10.2%; May and June's payrolls were revised up; average hourly earnings rose 0.2% and the participation rate held constant at 61.4. We expect better numbers in the months ahead which will support an improving economy. And what happens to consumer and business confidence once vaccines begin to be available later this fall? And how about economy?
Economic growth in China has improved but will not return to growth rates before the pandemic until global demand improves as exports/production comprises over 60% of Chinaâs GNP. The same goes for Germany and other parts of the Eurozone. We are not surprised that tensions between the U.S and China are rising as it is a key political issue for Trump. We must protect our IP and make sure that all companies that list on our exchanges satisfy global accounting standards to protect investors.
We will remain in a very low-interest rate world for a very long timeâ¦years. Pandemic aside, we have long said that future inflation would remain surprisingly low due to globalization, technology, and disruptors. However today we are living in a pandemic that has caused a global recession such that the Fed, ECB, Bank of England, and BOJ are all keeping short rates near zero and are also using quantitative easing policies buying all sorts of debt of all durations. We also have governments providing massive stimulus providing liquidity to individuals and companies.
Notwithstanding, we still see the yield curve steepening slightly over the next two years as economies improve boosting operating rates and inflation off the bottom. Just imagine interest rates staying so low for several more years. Wow!
The big upside surprise over the next several years will be the level of corporate operating margins/profits/cash flow as managements are taking a hatchet to costs to right-size businesses during the pandemic and are learning that they can do more with fewer people on site. Higher operating margins historically result in higher stock prices. Research plays a major role here separating the winners from the losers. It is not a zero-sum game.
Investment Conclusion
Our investment conclusions are based on this premise: an improving economy that wonât return to pre-pandemic levels until we are all can be vaccinated; vaccines being available for all before the end of 2021; extraordinarily low levels of interest rates; excess liquidity in the system for many years; and additional government stimulus programs. Corporate profits will surprise on the upside as operating margins improve more than expected as costs stay contained as the economy improves. Cash flow will be stronger too as spending remains restrained for several more years.
Bottom line: we remain favorably inclined to stocks, industrial commodities, and gold. While our portfolios remain significantly overweighted in the winners in the new normal, especially technology companies, we recently added some moderate growth defensive companies offering above-average dividends as well as some well managed economically sensitive companies that have navigated successfully through the pandemic and will come out of this even stronger. It Is amazing what low-interest rates do for valuation in a low inflation, slow-growth world. You can pay up for real, sustainable growth when the discount factor is so low.
What will happen to the stock market when a vaccine successfully passes Phase 3 testing while several trillion dollars are sitting on the sidelines? What happens to all the money in the bond market as the yield curve begins to steepen? Think about it!
Our weekly webinar will be held on Monday, August 10th at 8:30 am EST. Remember to review all the facts; pause, reflect, and consider mindset shifts; look at your asset mix with risk controls; turn off cable business news; do independent research listening to earnings calls and⦠Invest Accordingly!
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Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.
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