What role do bondsA financial instrument representing an IOU from the borrower to the lender. Bond issuers promise to pay bond holders a given amount of interest for a pre-determined amount of time until the loan is repaid in full (otherwise known as the maturity date). Bonds can have a fixed or floating interest rate. Fixed-rate bonds pay out a pre-determined amount of interest each year, while floating-rate bonds can pay higher or lower interest each year depending on prevailing market interest rates. play in a portfolio, and how do we approach a decision on shifting portfolios more heavily into stocksA financial instrument giving the holder a proportion of the ownership and earnings of a company.? Vice President Steve Johnson discussed our allocation process in our recent quarterly webinar*—Take Your Pick: Recession or Recovery?
Please enjoy the excerpt below and click here for the full webinar replay to hear more.
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Steve Johnson: I’ve learned more about the virus and medical data than I ever have in my 51 years over the last couple of months.
We are now looking at the four different metrics. And as we look at those metrics, we’re going to continue to focus on earnings. For example, right now—this week and next week—we’re in the midst of earnings season and we’re going to see how companies’ stocks react to their earnings releases. And so, as we know, expectations are pretty low.
We’re also looking at interest rates. If I had told you that the 10-year bondA financial instrument representing an IOU from the borrower to the lender. Bond issuers promise to pay bond holders a given amount of interest for a pre-determined amount of time until the loan is repaid in full (otherwise known as the maturity date). Bonds can have a fixed or floating interest rate. Fixed-rate bonds pay out a pre-determined amount of interest each year, while floating-rate bonds can pay higher or lower interest each year depending on prevailing market interest rates. would close under 0.6%, I don’t think I would have had many takers several years ago.
So, as we look at that and the economic data, what we’re going to see right now is a mixed picture—the earnings picture is quite blurry. And we don’t really know what valuations we should put on the market at this point and what the P-E [price-to-earnings ratio] should be. However, stocks are still attractive, especially as we compare them to bonds.
Technology has dominated the market to such an extent due to those names that you’re all familiar with, the so-called “stay at home” stocks. They have had such outrageous performance that it has created a huge divergence in the market among other sectors, such as industrials and materials. And our managers right now, I know, are thinking about those opportunities to take advantage of stocks and areas that haven’t participated over the shorter period and the longer period.
As we get through the earnings piece, and of course if we see more encouraging news regarding the virus, we will reassess, as we always do, our positioning. We’ve been a little bit underweight stocks. I mean, I think it’s been the right position, because the data is so mixed, but understanding that we’re looking at that on a daily basis and we know that there are areas of the market that will create great opportunity [down the road].
*Webinar recorded after the market closed on Wednesday, July 22, 2020.
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