Investment Committee explores benefits of low interest rates, risks of federal debt

Our investment work on your behalf is grounded in our Investment Committee’s continual research and analysis.

Here is an overview of key items being discussed by the committee:

• A recent Federal Reserve important announcement¹ is likely to keep interest rates low through 2023. Low interest rates tend to be good for stocks, bonds, metals (such as gold), and mortgage rates. On the other hand, cash in the bank and in money markets currently pays almost nothing, and, therefore, we want to be thoughtful about how much cash we maintain. We are in the process of making the final reinvestment, as suitable, of any cash we raised for you near the beginning of the downturn. (You may recall that we raised this cash when we saw risks in the quality bond market. We believe that those risks, at the moment, have largely passed.)
• There are signs that the upward trend in technology and communications stocks (Alphabet, Apple, Facebook, etc.) is trailing off and that the “positive energy” is moving toward stocks such as 3M and General Motors. 3M and General Motors are among the 65% of U.S. stocks that are in industries other than communications and technology (as measured by a broad stock market index, the Russell 3000.²) A major factor that could accelerate this movement of the “positive energy” toward the broader stock market would be a reliable COVID-19 vaccine. It is this potential opportunity that helps form our moderately positive outlook over two years (with uncertainties and challenges along the way). As suitable, we will continue to allow your stock percentage to grow 5% above target.
• The ever-increasing U.S. government debt³, especially with the recent stimulus spending, might increase inflation in the medium-term to long-term. We are watching this area carefully to determine the right timing, as suitable, to increase your “inflation fighters.”
• A weaker U.S. dollar creates potential positive influence on international stocks. We believe that client portfolios are already properly positioned, as suitable, regarding international stocks because approximately one-third of stocks are invested in this category. However, we are watching this area carefully with an eye toward opportunities (and risks).
• As the stock market has risen over the last few months, while we have seen poor economic news, we have all been reminded that the stock market’s performance is only loosely tied to the economy. In addition, it does not appear to be tied to the presidential election nor even to increasing COVID-19 deaths (other than when the economy was shut down). For example, the stock market has been rising over the last several months even as coronavirus deaths have doubled to nearly 200,000⁴ and as presidential candidates have been sharing their plans. The stock market tends to look out eight months or more and is currently assuming we will ultimately implement a largely effective vaccine no matter who is elected president. Right now, that outlook and any associated risks, take precedence over most everything else.

The Investment Committee meets regularly to analyze and synthesize the large world of global investing. The Laurel Wealth Planning team members and outside consultants on the committee have more than 100 combined years of experience.

Laura is the Chief Investment Officer, making all final decisions on the investment strategies we implement on your behalf.  I coordinate the meeting and do the pre- and post-work analysis to refine strategies.

You will sometimes receive communications from us as we adjust your portfolio to align with these global trends. We’re always happy to answer any questions you may have!

Sources

1. Federal Reserve Board. FOMC statement. Sept. 16, 2020.
2. Russell 3000 ETF exposure breakdowns as of Sept. 19, 2020.
3. U.S. Debt Clock as of Sept. 19, 2020
4. CDC death data as of Sept. 19, 2020.