We believe there is rash investor optimism for a market that is fully supported by central banks, investing accessibility, and positive news. We remain positive on profitable, growth focused investments and high yielding areas of fixed income markets; however, recognize the short and long term risks that exist in this market exuberance.

Some of these risks include:

  • the Federal Reserve changing course on interest rates and/or asset purchases
  • elevated state and local government shutdown activity
  • fiscal stimulus packages that could elevate inflation expectations and pressures
  • negative news and a shift in investor sentiment

What creates optimism? Apparently the ideal equation is a mixture of low interest rates, muted inflation, and physical isolation.

US investor risk appetite is at all time highs, along with the Dow Jones Industrial Index and many stocks in our economy. This is a truly impressive dynamic amidst the last few weeks of covid-19 case spikes, less than impressive third quarter company earnings, political uncertainty & turmoil, and a large global trade deal that excludes the United States.

Source: The Daily Shot 11.13
Source: The Daily Shot 11.13

Let’s examine each one of these dynamics.

Interest rates and stimulus

General market consensus is that the Federal Reserve will keep interest rates low in the US for a long period of time. Further, over 60% of central banks around the world have set their target interest rate below 1%. The S&P 500 has a higher dividend yield than the treasury bond market, which has inspired more stock buying, in our view. Some analysts and investors also argue that lower interest rates justify a higher valuation for technology and other growth stocks. We question whether actual valuation calculations are actually driving stock market returns, at this point. Notably, Treasury Secretary Steve Mnuchin just clawed back over $450M of CARES ACT funding, which could alter the Federal Reserve’s previous stance on keeping rates low for longer. 

Inflation

Reported inflation has remained very low, in spite of stimulus efforts from both monetary and fiscal authorities. Our view has held constant that stimulus efforts would push inflation higher; however, we have yet to see significantly higher prices in anything except risk assets, for example, growth stocks. Further, with the Federal Reserve also making asset purchases (over $100B/month), we’ll likely continue to see risk asset inflation until they indicate that they’ll stop purchases. With this said, market inflation expectations are beginning to price in higher goods.

Physical space

Low interest rates and physical isolation has fueled real estate activity – in both new home purchases and mortgage refinancing. Suburbs have seen high demand and low inventory for homes, which has pushed prices upwards. It’s difficult to determine if this will be a long term trend; however, we strongly believe it is a compelling time to lock in low interest financing for a home purchase in today’s market.

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Be safe this holiday season!

Zenith Solutions LLC is an Investment Advisor registered with the State of Pennsylvania. All views, expressions, and opinions included in this communication are subject to change. Any information provided has been obtained from sources considered reliable, but we do not guarantee the accuracy, or the completeness of, any description of securities, markets or developments mentioned. We may execute transactions that may not be consistent with this communication’s conclusions. Past performance is not a guarantee of future results. All historical returns, expected returns, or probability projections, are hypothetical in nature and may not reflect future realized performance. This material is intended for information purposes only, and does not constitute investment advice, a recommendation or an offer or solicitation to purchase or sell any securities to any person in any jurisdiction in which an offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The opinions expressed are as of Nov. 9, 2020, and are subject to change without notice. Reliance upon information in this material is at the sole discretion of the reader. Investing involves risks. Asset allocation and diversification does not guarantee investment returns and does not eliminate the risk of loss.

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