Decades from now, a new generation of investors may have a hard time pinpointing the Covid 19 Pandemic and lockdown era on a historic stock performance chart. With the S&P up more than 17% in 2020 and another 13% or more year to date, while the US economy shrank as much as 30% annualized in a single quarter, we should not be too hard on this future generation. What to us appears to have been the second most material event of the century so far (second to the 2008 credit crisis), played out to have been a “massive buying opportunity”. With the Federal Reserve flooding the markets with liquidity, and the rapid response of fiscal stimulus through the passage of the CARES Act, any immediate market pessimism was within a couple of months replaced by risk taking ad nauseum. Even as 2021 has progressed, renewed fiscal stimulus, Federal Reserve monetary accommodation and expectations of a massive infrastructure spending bill have all helped keep the stock market on the front foot. With this backdrop, we are not surprised most investors seem to be asking for more equity exposure, particularly in a world of few income generating alternatives.
For those investors looking to put capital to work, the alternatives seem slim: money market rates effectively zero, 10-year US Treasurys offering less than 1.6%, investment grade bonds at less than 2%, high yield (junk) bonds less than 5%, and the earnings yield (the inverse of the P/E ratio) on the S&P 500 at around 4.6% (with a dividend yield of around 1.4%) (source: YCharts, Inc.; Sixty Guilders Management, LLC). Under such an environment we continue to encourage prudence, patience, and long-term thinking. We would rather own fewer equities and less risky equities in such a market, willing to forego upside performance for better downside protection.