We feel confident about the repositioning we were able to do during the pandemic and ensuing market volatility. While we are not aggressive buyers of stocks at current levels, we will likely add to high quality equities on any meaningful weakness. However, the bond market, particularly government bonds, is worrisome, with interest rates at record lows and over $15 trillion in international bonds trading at negative interest rates. Low interest rates are a negative for savers, and at these levels, Treasury bond yields cannot keep up with current and future inflation levels.
We are hopeful, like everyone, that the spread of the coronavirus will run its course as quickly as possible and that the number of human lives lost will be limited. In the meantime, we want to assure you that we remain laser-focused on client communication, planning and portfolio management to assure both current income and competitive returns through market cycles. We have taken the current market dislocation as an opportunity to upgrade our holdings into higher-quality companies with a more durable business model.
We expect spikes in volatility through the second quarter as investors assess the near-term spread of the coronavirus and other geopolitical events. While developments in any economic and human pandemic are nearly impossible to forecast, Shorepoint’s process remains thoughtful, disciplined and flexible. This is a time when experience matters. Know that the Shorepoint team is working diligently to manage risk and returns as well as position the portfolio for the long-term.
We are cautiously optimistic that U.S. equities, and in particular dividend growth stocks with high free cash flow, can continue to move higher in 2020. In an economy with modest growth, low interest rates and above average valuations, returns will likely be driven by earnings growth. Recall from last quarter’s newsletter that we lowered our return expectations in September across stocks and bonds. We expect spikes in volatility through the year as investors assess the U.S. elections, trade negotiations and other geopolitical events. While developments in any macro category are nearly impossible to forecast, Shorepoint’s process remains thoughtful and flexible as we deal with the lowest interest rates and political conditions we have not seen in years.
The year began with the government stymied by a shutdown, and ended with articles of impeachment levied against the president. In between, both domestic and global economies showed signs of slowing, all while the trade war between the United States and China loomed throughout the year. Nevertheless, investors remained relatively bullish toward stocks, pushing several major indexes to record highs.
©2020 Broadridge Investor Solutions, Inc.
We don’t have a dour view of stocks. Rather than try and call the economic cycle, we continue to invest in companies with strong free cash flow, strong business models, and conservative balance sheets. While we think there may be an earnings lull, and we worry about trade wars and Washington missteps or non-steps, the historically low unemployment rate around 3.5% with modest wage growth, should provide a ballast for the overall domestic economy. Furthermore, the weakness in manufacturing is relatively small compared to the strong consumer segment of economy which accounts for two-thirds of economic activity. In many economies, and in the U.S. in particular, households are enjoying low unemployment, rising wages, and savings from refinanced mortgages. With household wealth and incomes in relatively good shape, we believe the risks to the broader economy have fallen.
As a firm we have lowered our return expectations across stocks and bonds. Our dimmer capital market assumptions will result in clients’ target returns being slightly lower going forward. We are carefully reviewing how these changes affect clients’ financial plans, and we will be reviewing these results in detail with you in our meetings and calls over the next 6-12 months. We will continue to reflect—to be thoughtful and flexible as we deal with interest rates and political conditions we have not seen in our careers. As ever, we remain focused on navigating risks and identifying opportunities.
The third quarter was full of ups and downs for stocks, much like the second quarter. Stock values moved in response to the rhetoric from the participants in the trade war between the United States and China. The Federal Reserve lowered interest rates two times during the quarter. More new jobs were added, but at a reduced rate, while wage growth continued. Manufacturing and industrial production remain muted, influenced, in part, by the waning global economy. Nevertheless, consumers were undaunted by economic developments, spending at a steady rate throughout the quarter.
©2019 Broadridge Investor Solutions, Inc.
The second quarter was full of ups and downs for stocks as investors had plenty to worry about. Throughout the quarter, the trade war between the United States and China ebbed and flowed as news continuously changed from positive to negative. Employment was steady and the unemployment rate remained low, but wage growth was moderate at best. Manufacturing and industrial production hit a snag during the second quarter, as did business fixed investment.
©2019 Broadridge Investor Solutions, Inc.
In this moment, we are witnessing an incredibly long run of prosperity in the U.S.. Certainly one could argue that it is not as shared as it had been in past economic expansions. And it is also aided and abetted by massive government debt (not more than most other nations though) and an accommodative, if not loose, Fed printing money whenever nudged. Companies continue to grow earnings, pay low taxes, return cash to shareholders (dividends and buybacks), and provide shareholders competitive returns. Unemployment remains the lowest it has been in decades and inflation is muted. Household net worths are growing, and consumers have reasonable debt levels given their income.
Shorepoint’s core philosophy is to manage diversified portfolios of quality, reasonably valued assets based on your investment objectives and risk tolerance. This has and will continue to be a successful investment strategy over the long-term. We seek to take advantage of opportunities as they arise and generate attractive long-term returns to help our clients reach their financial goals. As always, we are available to discuss your concerns and answer your questions.
Overall, Shorepoint is constructive on the current investment landscape. Low interest rates, solid corporate margins, significant corporate cash returned to shareholders (dividends and buybacks), low inflation and steady economic growth have driven strong equity returns since the Great Recession. Valuations as measured by price/earnings multiples are in line with historical averages and are not excessive. We continue to invest in a variety of investments across asset classes that potentially offer sound long-term, if not spectacular, returns to patient investors.
As contrarians, we have added and continue to add to international, developed market equities and emerging market equities/bonds, which we feel are still undervalued even with the 2019 rebound. We are employing a “buy the dips” approach by adding to high-quality, attractively-valued companies that have robust cash flow, strong earnings growth prospects and solid balance sheets. We are investing more in the underperforming healthcare sector which has been in the cross hairs of politicians and allocating to selective special situations that offer favorable risk-adjusted return potential. Individual stock price volatility enables us to perform tax harvesting in companies that are temporarily depressed but that we feel are excellent long-term investments such as CVS Health and Kraft Heinz.
The bond side of our portfolios has rebounded strongly with the Fed moving to the sidelines on further interest rate increases in the near-term. The Fed’s policy change has allowed us to reinvest some of our client’s money market balances into higher-yielding bonds. Overall, our clients continue to benefit from our diversified approach to producing income by investing in Emerging Market Bonds, Floating Rate Loans, REITs, Preferred Stocks, etc. instead of investing just in U.S. treasuries.
Shorepoint’s core philosophy is to manage diversified portfolios of quality, reasonably-valued assets based on your investment objectives and risk tolerance. This has been and will continue to be a successful investment strategy over the long-term. We seek to take advantage of opportunities as they arise and generate attractive long-term returns to help our clients reach their financial goals. As always, we are available to discuss your concerns and answer your questions.
Following a tumultuous close to 2018, stocks enjoyed a robust January. Positive feedback from ongoing negotiations between the United States and China, coupled with strong job growth, low inflation, and stable interest rates, helped fuel investor confidence that pushed the major benchmark indexes to levels not seen in 30 years — despite a partial government work stoppage. Each of the indexes listed here posted notable gains, led by the small-cap Russell 2000, followed by the Nasdaq, S&P 500, Global Dow, and the Dow.
©2019 Broadridge Investor Solutions, Inc.