What’s Obvious Right Now?

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It's April, and it seems as though the world of investing is falling apart all around us.

I recorded this podcast following our April Portfolio Review Meeting (PRM). For our readers and listeners who don't know, our PRM is a monthly meeting in which all of the Denver Wealth Management advisors (aka, the Investment Committee) collaborate on our current positions and outlook.

We address every stock, bond, mutual fund, and ETF in our portfolios to determine its current performance along with the short- and long-term outlook.

When I say the world of investing is falling apart, it's always falling apart in the short-term; uncertainty reigns supreme. Thus, the short-term—the now—is always a scary time to invest. However, April has been especially intimidating. Interest rates are low and rising, and the Fed is printing a vast amount of money, signaling inflation.

Look at lumber, for instance. As of February 2021, lumber prices had jumped 112% higher than they were just one year ago.¹ Low interest rates lead to higher housing demand, which leads to more residential construction. (What do you need to build houses? Lumber.)

If you take low rates and inflation, then add costly equity prices, it can be a nerve-racking time to invest. The S&P 500 closed out 2020 with a price-to-earnings (P/E) ratio of 39.90, 15 points higher than its average dating back to December 1988.²

If you listened to our episode on bonds back in March, then you know bonds aren't a solid investment option either unless you're a retiree. So, what is an investor to do?

WHAT’S OBVIOUS RIGHT NOW?

[2:57] In our PRM, we talked about just that: what is obvious in the market and economy right now. As an investor, it's often easier to make long-term investment decisions by focusing on the indisputable information at hand.

INTEREST RATES ARE OBVIOUS

[3:21] The first point that was obvious to our Investment Committee was interest rates, specifically their floor-scraping levels. Note: When I refer to interest rates, I'm talking about the discount rate set by the Federal Reserve Board (FRB).

Most financial professionals, including Fed Chairman Jerome Powell, firmly believe that rates will stay low until 2023—that's almost two whole years with low rates. As investors, we can derive two things from that.

First, bonds probably won't generate braggadocious returns. And second, low rates are good for stocks. Low rates allow corporations to borrow cheap money and ambitiously drive growth. In other words, investment capital is far more accessible.

CORONAVIRUS IS HERE TO STAY

[4:19] Both literally and figuratively, the virus that has ruined lives for that past year isn't going away. From a literal perspective, the news constantly reports new strands, each one stronger than the last. On top of that, health officials are beginning to question the efficacy of vaccines (see: Johnson & Johnson).

From a figurative standpoint, coronavirus has changed the world around us—some changes are more permanent than others, such as working from home. I have several friends who have moved across the country, assuming their next job will allow them to work from wherever, which may not be too much to ask.

ESTABLISHING A BASELINE

[5:41] Once you address what's obvious, you can establish a baseline and grow from there.

"OK, I don't love bonds. Let's look at stocks."

Unless you're a retiree, you don't need bonds, so what are your stock options? There are still plenty of growth stocks (2020's golden child) available, but we don't want companies trading at 200 times earnings (keep an eye on a company's P/E ratio when analyzing your options).

So, we can look at value companies, such as steel manufacturers and banks that are trading at only four times earnings (again referring to P/E ratio), for instance. These companies may not be sexy or desirable because they aren't monopolizing space in financial headlines. However, many can still offer reliable, long-term growth opportunities.

[7:41] Right now is an interesting time to be an investor. 2020 was a rollercoaster in the stock market. Still, many investors are so infatuated by the stock-market-cool-kids that they're missing out on opportunities in the majority of the investable market.

And I get it. These trillion-dollar corporations that produce products that stare consumers in the face all day are recognizable—they're exciting—but they aren't necessarily the best long-term investment vehicles.

FINAL THOUGHTS

[9:41] I wanted to keep this podcast short and sweet. Although it may be intimidating—even a little scary—April is a good time to be a stock market investor. Volatility will certainly test your emotions, but if you can shift your money mindset to focus on your long-term objectives and what’s obvious, then now becomes a much more exciting time to invest.

Follow me on Twitter for some daily bite-sized financial notes. I don’t mean to brag, but one of my tweets recently went viral, which was a fun experience. I would recommend it.

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Sources

¹Olick, Diana. “Thinking of a New Wooden Deck for Spring? It May Bust Your Budget.” CNBC, 10 Feb 2021. https://www.cnbc.com/2021/02/10/lumber-prices-skyrocket-pushing-up-housing-costs.html (Accessed 27 Apr 2021)

²“S&P 500 P/E Ratio.” ycharts.com. https://ycharts.com/indicators/sp_500_pe_ratio (Accessed 27 Apr 2021)

Disclosures

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

All investing includes risk including the possible loss of principal. No strategy assures success or protects against loss.

All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.

The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.

Bonds are subject to marker and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price.

Growth investments may be more volatile than other investments because they are more sensitive to investor perceptions of the issuing company’s growth of earning potential.

Value investments can perform differently from the market as a whole. They can remain undervalued by the market for long periods of time.

Companies mentioned are for informational purposes only. It should not be considered a solicitation for the purchase or sale of the securities. Any investment should be consistent with your objectives, time frame and risk tolerance.

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