The 2nd half of 2020: Current Events and Investment Management
Various economic recovery predictions were highlighted in last week's SAS Newsletter. Recovery curves represented by similarly shaped letters are used usually U-shaped, V-shaped, K-shaped, etc. SAS underlines the elements leading to a K-shaped economic recovery prediction. Today we highlight more of the latest events that have happened this week in 2020.
Ruth Bader Ginsburg passed this week on the day Rosh Hashanah, the Jewish new year, began. It is a reflective time of year as well as a celebration of the new year. The Jewish High Holy days begin with Rosh Hashanah and end 10 days later with Yom Kippur the day of repentance. RBG’s passing on Rosh Hashanah was certainly not a celebration but undeniably her life was one to celebrate regardless of whether you agreed with her decisions or not.
One 13 year old African-American girl interviewed exclaimed, as she and her mother paid their respects in front of the Supreme Court, “RBG was a superhero who wore a robe instead of a cape!” Ruth Bader Ginsburg was from Brooklyn, went to James Madison HS with my cousins who lived upstairs from me, and graduated from Cornell University, my alma mater. Her passing is another important, challenging event to add to the many of 2020. The Jewish New Year is over and I am looking forward to the secular new year and entering 2021 which will be a fresh new start and a final closeout of the year that was 2020.
Federal Reserve Chairman Jay Powell spoke in front of Congress with Treasury Secretary Mnuchin and both stated that as the existing fiscal programs end that more needs to be done by Congress. The Fed will continue the existing lending programs and monetary intervention with interest rates staying low for the foreseeable future. The Fed will continue to buy various securities including ETFs. Most importantly, the Fed has its limits including a lackluster reception for its “main street” lending programs. This is one reason why the K shaped recovery is most likely. 10 million Americans remain unemployed, and without fiscal help from Congress, the K shaped recovery could be followed by a second recession. With the election imminent. accompanied by a high degree of uncertainty in regard to the reporting of results and any attempts to invalidate the election results, we will be careful.
Low interest rates on bond investments require a slightly altered fixed income strategy. We continue to buy bonds when we are offered good prices. To balance the low yields we are buying higher yield riskier securities with good long term track records. These are closed end funds that purchase preferred stock and use leverage (borrowed funds). The yields are around 7% and the distributions are about 80%. The distributions are “qualified distributions,” meaning they are taxed at the same rate as capital gains which is an added benefit to using them in our portfolios.
The stock market has had its first 4 days of decline in awhile until midweek when markets rose. We expect volatility to continue. In fact, even with the recovery from March lows, the measure of stock market volatility (risk of decline and or sway from gains to losses) is staying elevated. Stock market volatility is represented by the stock index called the VIX. Despite gains in the market averages, the cost to protect against market declines is of continued importance. We respect the volatility indicator and continue our cautious strategy.