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Two weeks to go...

| October 19, 2020
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With only two weeks left before the election, many people are trying to get a feel for what will happen once it’s done. Of course, without knowing the outcome ahead of time, we are only making educated guesses. If I go back to four years ago, we all thought that Hillary would win and that if Trump won the markets would plunge. If you remember the futures markets were pointing to a major selloff in the overnight hours as Trump looked like he was going to pull off the surprise victory. By the opening of the US markets, those losses had shrunk considerably and by the end of the day the Dow had finished up – and this was just a precursor for further market appreciation in the weeks to come. Who would have thought that?

As we head into the final days, the national polls show Biden up by many points and the odds makers are showing a distinct advantage for Biden currently.

There is still one more debate, so things could change over the course of the next 15 days. Of course, what ultimately determines all of this is what you say at the ballot box. Please get out and vote (or mail your ballots here in Washington).

Jeff and I were on a conference call early this morning with Guggenheim Partners, one of the largest bond managers (and one of the best, in our opinion). The chart below shows the 10-year treasury yield, now around 0.75%. With many backward-looking models using 4%-5% for bond portfolios, it’s seems quite unlikely to achieve that with a heavy allocation to Treasuries going forward.

The next chart shows the spread between Treasuries and high-yield bonds, which are considerably off their high spreads from March of this year.

 

Guggenheim’s opinion is to look for opportunities in different fixed income areas that still have value, such as some high-yield, CLOs, and certain asset-backed bonds. The trick there is to do credit work well (meaning do a great job in figuring out if you’ll be paid on those bonds you own!) and that is where Guggenheim excels. With the Federal Reserve removing any opportunities in Treasuries, tax-free municipals, and high-grade corporates, one must either except negative returns relative to inflation or credit risk. For us, we think credit risk is the way to go, especially with a partner who does that well. Regardless of your choice, it’s safe to say your grandma’s bond portfolio can look nothing like that of old if the same outcomes are desired – and that is just one thing making investing so difficult in this environment.

Finally, let’s take a look at the latest unemployment rate from September. You can see below that the rate has fallen from almost 15% to roughly half that at 7.9%. Two issues with that:  1) It paints the economy with a very broad brush and, 2) While the rate is down almost in half, it is still almost double where it was prior to COVID-19.

As for the discussion of a ‘K’ recovery versus a ‘V’ recovery, I think it’s pretty clear that depending on what part of the economy you are in, you will be experiencing a very different economic outcome.  As everyone knows now, the leisure, entertainment, and travel space has been most affected by this virus, while big retailers and companies that have the ability to work remotely have seen the least negative impact. The real question going forward is how likely is it that regulations and shutdowns will be loosened and even if they are, will everyone want to go about life like it was prior to March? We will continue to see how that unfolds over the winter and into next year.  I’ll add, many will say “until a vaccine” – but we have seen increasing evidence in the data and anecdotally that there is great skepticism about any vaccine and have to question what the adoption rates will really be.

As always, we welcome your comments and questions. In the meantime, we’ll continue to test our assumptions, dig into our research, and lean into our model as we seek to be ever mindful of risk while pursuing long-term returns for your portfolio. While we’re doing that, we encourage you to dig into those voter’s pamphlets and make educated choices using the greatest privilege we have as citizens of the USA.

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