Mixed Signals: How Should Investors Proceed?
The news has been a mixed bag in recent days, keeping investors off balance. Below, I try to make sense of the conflicting data. I also pinpoint an investment opportunity.
Before I delve into the latest pandemic-era developments, a few words about the perpetual bears.
I recently pulled an investment book off my shelf and got reacquainted with its themes. It’s a dire tome, warning of global economic and financial collapse because of the moral failings of policymakers in countries everywhere. The book’s advice: sell stocks, sell the kids, sell everything!
The book was a bestseller that came out in 2010. If you had followed this author’s advice, you would have missed the longest bull market in history.
Professional courtesy prevents me from naming the book or author. I mention all this because, even though I’ve regularly sounded warnings about certain market risks, I have no patience for the financial world’s fear-mongering gloomsters. There’s still plenty of money to be made in this market, but you need to deal in reality, not fantasy.
Yes, we face challenges. Even if the coronavirus magically disappeared tomorrow, the pandemic already has caused significant economic harm that will be felt for a long time. But I’m confident that 2021 will be a prosperous year for investors, as a new administration takes power in Washington, COVID-19 vaccines come to the fore, and massive fiscal stimulus gets enacted.
Another reason for my optimism is pent-up demand. Americans who remained employed did a huge amount of saving while stuck in quarantine. Those liquid assets will make their way into the economy when the virus is eventually vanquished. What’s more, the Federal Reserve’s ultra-dovish monetary policy isn’t likely to change anytime soon.
As for President Trump’s legal challenges to the election, they’re certain to fail. That’s not a partisan view but merely a statement of fact that’s grounded in the U.S. Constitution.
Keep your eye on the long-term horizon. Don’t make investment decisions based on short-term drama. Position your portfolio now, for the boom to come. Keep reading; I’ll show you how.
Good news/bad news…
Worries about rising COVID-19 cases have been offset by announcements of promising vaccines. In turn, vaccine optimism has been dampened by the realization that their production and distribution will be difficult and many Americans will refuse to get inoculated. Rising jobless claims have been balanced by better-than-expected corporate earnings. The end of the presidential election has been clouded by the Trump team’s fruitless efforts to contest the results.
Through it all, the markets have remained buoyant. On Thursday, the Dow Jones Industrial Average rose 44.81 points (+0.15%), the S&P 500 climbed 14.08 points (+0.39%), and the tech-laden NASDAQ jumped 103.11 points (+0.87%). Investors moved back into market-leading tech stocks that have shown resiliency during the pandemic. We also got glimmers of hope yesterday that maybe, just maybe, stimulus talks would resume this month in Washington.
Small-cap stocks have outperformed in recent weeks, as Wall Street starts to place greater faith in Main Street’s eventual recovery. The Russell 2000 index has jumped 15% so far in November.
That said, the soaring rate of coronavirus cases remains a concern. In pre-market futures trading Friday, the three main U.S. stock indices were poised to open lower. Sagging employment numbers are further dampening Wall Street’s mood, in the run-up to Thanksgiving week.
The Labor Department reported Thursday that jobless claims totaled 742,000 last week, exceeding the 710,000 estimate by economists. The disappointing data snapped a four-week streak of declining claims.
We’ll continue to experience market volatility this holiday season. Nonetheless, corporate profits have surprised on the upside.
With 92% of S&P 500 companies reporting third-quarter operating results, the numbers are remarkably strong. To be sure, the overall blended decline in third-quarter earnings is -6.6%, but initial projections had been far worse. On September 30, the estimated earnings decline for Q3 2020 was -21.2%.
Here are the beat rates for Q3 relative to the previous quarters in 2020:
Stocks will continue to ebb and flow over the short term, as better-than-expected earnings vie with worse-than-expected coronavirus outcomes. After initial confidence that it would soon be contained, COVID-19 is gaining virulence, just as the winter flu season kicks into gear.
The fixed income picture…
As a result of the Federal Reserve’s aggressive interest rate cuts and bond buying programs, returns for fixed income investments have been strong.
Fixed income asset classes year-to-date have been among the top performers along with gold. More aggressive plays did best in Q3 as stocks outperformed bonds during the quarter. However, conservative portfolios have racked up solid returns (see the table).
Wall Street doesn’t expect any major policy changes from the Federal Reserve for at least the first six months of Biden’s presidency. As economic growth picks up next year, the consensus is that 10-year Treasury bond yields will trade in a range of 1% to as high as 1.6%.
Psychiatrists call it cognitive dissonance, the mental discomfort experienced by someone who holds two or more contradictory beliefs. It’s a form of psychological stress that can paralyze decision making.
Accordingly, the economy is sending dissonant signals, which makes it difficult to position your portfolio for the months ahead.
How should you allocate your portfolio as 2021 looms on the calendar? Our flagship publication, Personal Finance, suggests the following as general guidance:
At least 5%-10% of your hedges sleeve should contain gold, the classic safe haven during tumultuous times such as we’re experiencing now.
Those with a higher tolerance for risk are reaping some tremendous profits from junior gold miners. These small mining companies not only make prime takeover targets, but as a whole have been strongly performing asset classes this year.
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