By Todd Bogda
If you had been so lucky as to have set sail around the world in January of 2020 with no access to the internet and were only now emerging back onto shore, you could imagine your shocking discoveries.
Your family does not want to hug you hello despite the time away. Your favorite restaurants only serve takeout, if they are still open. You are required to be disguised with a mask to enter your bank, and your favorite NFL team plays to an empty stadium.
Upon realizing the severe nature of the pandemic that you had been oblivious to while on a boat, you immediately think to check your investment portfolio, as surely it will have suffered based on the empirical evidence around you.
Shockingly, you discover your equity investments are up nicely and your home price has risen in value—all this with U.S. GDP growth projected to be -4.3% and an unemployment rate of 6.9% (down from 15%). “This doesn’t add up. What did I miss?” you think.
Unprecedented responses from the Federal Reserve (monetary policy) as well as Congress (fiscal policy) have assuaged market fears of a prolonged recession. The balance sheet of securities purchased by the Federal Reserve has risen from $3.9 trillion pre-crisis to $6.6 trillion and growing. For the first time in the Fed’s 107-year history, it has been permitted to lend taxpayer money to private corporations, thus taking on credit risk on our behalf.
Similarly, aggressive moves by Congress through the CARES Act and the most recent stimulus bill have added close to $3 trillion in economic relief. The good news is that this spending has bridged the gap so far, and the COVID-19 vaccine is already being deployed. So, where do we go from here?
The Federal Reserve is maintaining a Zero Interest Rate Policy (ZIRP) for the foreseeable future. With a current 10-year inflation expectation of 2% and a current 10-year treasury yield of 0.94%, the real yield (nominal yield minus expected inflation) is negative. This negative expected return in “safe” U.S. Treasury bonds is forcing excess money into stocks, gold, cryptocurrencies and speculation in various other investments.
The Fed policy is forcing investors further out the risk spectrum to find yield. This is always concerning for money managers, but it can be effective if the policies create a significant increase in economic growth. This growth can then be used to pay down debt through increased tax revenue as well as create higher levels of inflation, which devalue current debt obligations. That is, if everything works swimmingly well!
As we enter 2021, I promise we will still be wearing masks. Unfortunately, that restriction is not tied to a finite date on the calendar, and if perhaps there is a whisper of said “freedom” date, I am not privy to that closed-door discussion. So, we continue to invest while wearing full PPE.
We are on the lookout for signs the market is pricing in higher inflation. We continue to keep an eye on 10-year treasury rates, the U.S. dollar and consumer demand. International markets continue to look attractive. There is always opportunity somewhere.
Happy New Year.
Todd is a Financial Advisor at Stonebridge Financial Group. His focus is providing exceptional service to individuals, families, and institutional clients, implementing investment portfolios and asset allocation techniques in an effort to achieve client-specific investment goals.