The S&P 500 surged over 7% last week in its best week since April, and the rally continued into this week with Monday’s announcement of a promising vaccine from Pfizer. In recent history, markets more or less have done well following elections regardless of who wins. As such, we quickly positioned portfolios a bit more aggressively during the pre-election market downturn by adding to stocks at more attractive valuations. Even looking at it from an income perspective, roughly two-thirds of the S&P 500 companies have a dividend yield above the 10-year U.S. treasury bond. With five vaccine candidates in phase three trials, returning to a new normal may happen more quickly if any one of the leading candidates is proven effective and logistical challenges with distribution do not prove too cumbersome.
As such, government fiscal stimulus in 2021 may be smaller than it would otherwise have been just a month ago. Also, a divided government is unlikely to agree on tax priorities, creating obstacles for any proposed corporate and individual tax hikes. With that in mind, we are more optimistic on equities than we have been at any other point in 2020. In particular, we believe value-oriented stocks are well positioned because they are not only cheaper than growth stocks, but also have brighter prospects for earnings growth in the years ahead (because current profits are depressed). Faster growth and cheaper valuations are an investor’s dream, and we have largely built out this exposure for the future using some of the strong performance we’ve seen in other areas of the portfolios we manage. Based on the Federal Reserve’s new policy framework for inflation targeting, we believe interest rates will remain low for some time and will continue to favor bonds with credit spreads that are able to cushion the impact of rising rates as we slowly return to full employment. In the longer term, we continue to see the potential for higher inflation barring further tax hikes or spending cuts.
As always, the JNBA Investment Committee will monitor and adjust portfolios as events change. Finally, we believe an important point was made even more clear this month – time in the market, not timing the market, is critical to achieving your long-term goals.
Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from JNBA Financial Advisors, Inc.
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