After a year”™s worth of tumult created by the Covid-19 pandemic, a genuine light at the end of the tunnel might be shining, especially for investors eager to participate in a stable economy.
Bridgeport-based People”™s United Advisors detailed the encouraging economic developments and their impact on the financial markets in the April 7 webinar “The Road Ahead: Market Insights and Outlook.”
“There”™s a momentum in the economy,” observed John Traynor, executive vice president and chief investment officer at People”™s United Bank. “Manufacturing in the United States in the month of March hit a high that we have not seen since 1983, and we saw consumer confidence rise to the highest level in the last year. Consumers are feeling more confident about their own situation and feeling more confident about the economy.”
Spurring this new enthusiasm, Traynor pointed out, was the rapid rollout of Covid vaccinations, with nearly three-quarters of adults 65 and over being vaccinated and 38% of all adults receiving at least one dose. The cherry topping to this data, Traynor added, was the national unemployment level reaching a post-pandemic low of 6% in March.
Most importantly, Traynor insisted, these positive developments will not be ephemeral.
“We think it”™s sustainable,” he said. “The actions that the Fed is taking and the actions that we”™re seeing out of Washington on the fiscal stimulus side will continue and will actually help keep this economic momentum going for quite a while.”
For investors seeking a game plan for the months ahead, Traynor identified four key filters for reviewing the evolving data in order to make proper decisions: a consideration of the wider economy and its current state of health; the price of the different asset classes being selected for potential investment; the ongoing investment trends and the directions that other investors are moving in; and identifying an appetite for risk.
“We saw the market decline, we saw the pandemic, we saw a recession in March,” he said. “What we”™re seeing now is an early cycle ”” indicators tell us that the economy is going to be improving, interest rates will probably be increasing, so we want to have more of an early cycle portfolio.”
Albert Brenner, director of investment and economic research at People”™s United, said that “market sentiment is generally positive and supportive of risk assets,” but admitted optimism can get out of hand and noted that “we are watchful for signs of irrational exuberance, which we have not seen yet, fortunately.”
Brenner added that his company views risk “very differently than our competitors in the investment management business” by sharing the sentiment of clients who view risk as a permanent loss of capital that comes with deep emotional trauma.
“It”™s important to remember that risk is not a single number,” he said. “We all love upside volatility, but it is that negative volatility we don”™t like. So, when the market is volatile, that gives you an opportunity to potentially sell some assets and take some profits when you think they”™re overvalued.”
One area of the current economy that Brenner found dramatic were profit margins ”” or, more accurately, the lack thereof.
“The real striking fact is how low profit margins are right now,” he said. “We saw profit margins in the 10 and 20th percentile. So, all things being equal, you might look at that and say, ”˜Well wait a minute ”” low profit margins?”™ But companies have room for big improvement and profits.”
Brenner also cautioned that any investing decision at this time should be based on a wider data analysis of all other investment options and not a standalone basis.
“With interest rates as low as they are right now, the prospects for bonds and cash are particularly favorable compared to stocks ”” even with a sharp selloff in stock prices that we experienced last March and April,” he said.
Traynor recommended that investors need to consider long-haul investing on growth stocks.
“One of the things you need to understand when you take a look at growth versus value,” he said. “Take a look at the growth indices: They”™re very heavily weighted to technology stocks. If you take a look at the value indices, they”™re very heavily weighted toward the financial stocks that haven”™t done a whole heck of a lot for the last 10 years. Well, with this rise in interest rates and with the improving economy, the bank stocks have actually done very, very well really over the last 12 months, and especially this year.
“If we see the financial stocks continue to do well,” he added, “we”™re probably going to see value stocks do well. So, one of the things that our equity team started to do last July was growth stocks have had a great run ”” so let”™s start decreasing our emphasis on growth stocks and portfolios and move our portfolio back more toward neutral. We”™ve also taken a look at some of the mutual funds and ETFs we own and portfolios and said, ”˜Some of these growth funds have done very, very well. Maybe we should take some profits and move over more toward the value side of the portfolio.”™”
Traynor also cautioned that investing is a long-haul commitment and the gains being planned for now will take 12 to 18 months to fully mature.
“When we”™re investing client dollars, we make sure that we”™re putting more money in our clients pockets and not sending additional checks down to the IRS,” he said.
