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Integrated Insights -- Week of September 21, 2020

Integrated Insights -- Week of September 21, 2020

September 21, 2020

Markets continue to react almost entirely with headlines regarding the virus. While any presidential election brings its share of market volatility, the 2020 race has been one of the more contentious races.  With the pace of Supreme Court Justice Ruth Bader Ginsburg, I expect the contentiousness of the race to ratchet up--perhaps also bringing an even larger spat of volatile market moves.  

Here's what we are reading this week:

Weekly Commentary -- Greater inflation risks ahead -- BlackRock

  • Three new forces are set to lift inflation beyond what markets are currently expecting in the years ahead, reversing a decade of subdued price rises.

  • Market volatility has returned after months of steady advances in risk assets, and could stay elevated as the U.S. election draws near.

  • Markets will focus on a slew of purchasing managers’ index data this week to gauge the latest business sentiment.

Yield: The Scarcest Resource -- Blackstone

The global economy has bounced back robustly from the COVID-induced lockdowns, but the pace of growth is expected to gradually slow. The Federal Reserve and other central banks will likely respond by keeping interest rates at historically low levels in order to support economic growth.  For investors, one of the greatest challenges they will face in this cycle is how to invest for income during the prolonged period of low rates that we expect.

One out of every five people in developed countries is aged 65 or older. Countries with the greatest proportion of their populations over the age of 65 are many of the same countries maintaining zero or negative rates.

As aging populations seek the security and yield of fixed income investing, the traditional 60/40 portfolio of public market assets looks increasingly inadequate in today’s lower-for-longer world. That traditional portfolio mix delivered a 3.5% yield after the Great Financial Crisis ended in 2009 but has since declined to less than 1.5%.iii

iii Source: Bloomberg, as of 8/31/20. “Traditional portfolio mix” refers to a model portfolio with 60% allocation to the S&P 500 Index and 40% allocation to the Bloomberg Barclays U.S. Aggregate Bond Index. 

Did we witness the shortest bear market ever -- T. Rowe Price

Fiscal and monetary responses from governments and central banks in both developed and emerging economies since March are without precedent, far surpassing actions taken during the global financial crisis.

  • Fiscal and monetary support from governments since March has been breathtaking. They are ready to do more if necessary to avoid a prolonged global recession.

  • In a low-growth post-coronavirus world, emerging markets with higher structural growth, such as India or the Philippines, become more important to investors.

  • After such a strong rebound it makes sense to trim risk, but not to become outright defensive as we believe we are in the early stages of a new equity cycle.