September 2020
“Election Day is quickly approaching. What an invigorating/ruinous night it promises to be! We dare say that we have never heard as much concern from our clients over a presidential election. Moreover, the concern we hear is universal regardless of one’s political affiliation – just with diametrically opposed viewpoints. If Trump wins – doom! If he loses – doom! Apparently, doom is a large branch on the decision tree in the election of 2020. We’ll take your word for it that this election will be one of the most impactful political moments of our lifetimes, but we’ll avoid debating the hot topics at stake in this election as finding consensus on most anything would be an exercise in futility. Instead, we want to talk about who will win!”
Candidate Tina
For investors, we believe we know who the winner of this election will be. Further, we predict that despite whatever short-term market reactions occur, this outcome will be neither as momentous nor as disastrous for your investment portfolios as some would argue. Without further ado, we’d like to introduce you to the winner of the election, who is neither President Trump nor former Vice President Biden, but Candidate Tina.
Candidate Tina started appearing in the financial media in late 2011. Back then, the world was trying to dig its way out of the Financial Crisis when the U.S. lost its AAA credit rating. The European Union was on the verge of collapse, and banks faced severe pressure from the prospect of sovereign defaults. As a result, bond yields collapsed globally to unthinkably low levels….or so we thought. That’s when Tina made her big splash on the investment scene. After a few years out of the limelight, she is again surging in popularity.
Tina stands for There Is No Alternative. The acronym aptly describes today’s investment landscape, and we think Tina prevails after the election, regardless of who wins. The basic premise of Tina is that since global interest rates are so low, investors have no alternative other than to put their money in stocks.
We saw the following chart this month that we thought reinforced the Tina platform:
An individual who wants $50k/year in investment income to live off of, but wants his/her money invested safely, might buy 10-year Treasury bonds – a perfectly plausible “safe” strategy. Back in 1998, one would need to invest approximately $900k to accomplish that objective. Nowadays, with a 10-year Treasury bond yielding 0.68% per year, one would need to buy roughly $8.3mm in 10-year Treasury bonds to get the same $50k/year in income…hence Tina.
The Fed’s Platform
The Tina mentality has played a role in this year’s sharp rebound from the March lows. According to the FDIC, the national average interest rate on savings accounts is 0.06% per annum. The annual yield on the Barclays Treasury Index is 0.47%. Sadly, in today’s fixed income world, more risk does not equate to much more return. The investment grade municipal bond and corporate bond indices yield 1.30% and 1.94%, respectively. Consequently, many investors are making the decision to put their marginal dollars into stocks. Of course there is a limited supply of good stocks out there (that is arguably even more limited since a number of formerly “good” companies are now not so good due to COVID), so an increase in demand for these securities means that stock prices rise, just like the Fed had hoped. Add in some “speculative fever” from certain investors ignoring valuation norms, and the result isn’t all that surprising.
Sure, that is a simplification of what is happening, but we believe it is an accurate summary (and applies to other risk assets from real estate to collectibles). The Federal Reserve wants to help the economy, but it only has a few tools to use. They are all aimed at altering the cost and supply of money in the hopes that businesses and consumers will take advantage and spend their way out of this downturn. Doubters say that low-cost money has been readily available for years, and we are pushing on a string by trying to generate growth from that strategy. We see the truth as somewhere in between the two arguments, but the Fed’s strategy is unequivocally stimulative for financial asset prices.
Words Matter
We believe this is a particularly important point to recognize because the Fed recently indicated that current monetary policy will persist, regardless of who sits in the Oval Office. For those who didn’t catch the Fed’s recent press conferences (and we don’t fault you on that point) – we will summarize. On August 27th, Fed Chairman Jerome Powell said, “Our new statement indicates that we will seek to achieve inflation that averages 2% over time.”1 This statement is notably different than the Fed’s prior policy of targeting a specific inflation rate of 2%.
If you don’t appreciate the policy nuance conveyed by Powell, allow us to use a real-world example. Note the difference in the following statements, as well as the likely subsequent responses, if said to your 17-year-old child:
1) Your curfew this weekend is 11 p.m.;
2) You can arrive home at an average of 11 p.m. this weekend.
If you communicated statement #2 to your child, you should not be surprised if you have a late night of waiting up. Similarly, Powell is telling you that he wants inflation to overshoot their 2% target, which means they intend to keep money cheap for the foreseeable future. The past doesn’t always predict the future, but history says that’s much more supportive for stock and bond prices than any presidential platform. The roadmap for our investment strategy appears fairly clear – own quality stocks (investors are seeking those) and do not foolishly “chase yield” in bonds (it would likely not be great to own low-quality or low-yielding bonds if Powell successfully generates inflation).
Yes, there will likely be some industries that are bigger winners/losers under each candidate, but in the aggregate, accommodative Fed policy is a strong wind at the back of investors. That is not to say we don’t see evidence of overly-speculative behaviors or other risks on the horizon – those always exist in markets – but we believe the fears of financial doom due to either candidate’s platform are overblown. In fact, we’d argue that the biggest election risk is that we have no clear winner, resulting in a prolonged period of heightened uncertainty. Even then though, we’re moderately confident that the powers that be of this wonderful 244-year-old country will figure out that quagmire. Until next time, we wish you the best on November 3rd, a day we all believe can’t get here soon enough.
1) www.federalreserve.gov/newsevents/speech/powell20200827a.htm