October
Current Investment Perspectives.
October
11, 2001
Historically, the period following a crisis-driven drop in the market has been steady market returns for several years. Since September 11, 2001, the money supply has experienced an enormous growth to stabilize and jump-start a deteriorating economic climate. Alongside the accommodative Federal Reserve, the U.S. government is considering multiple spending packages that should positively impact the economy.
The financial markets have maintained tremendous order during a difficult time. After the initial drops in the week that followed the attacks, the markets have made steady gains as a result of nine interest rate cuts since January, 2001. Long-term leadership in the stock market is being driven by necessity. Food stocks, grocery retailers, pharmaceutical, health care, and consumer non-durables have provided excellent havens during the recent market plunge. As the full effect of the current Fed stimulation is realized, we believe that a constructive environment is taking shape for positive corporate earnings gains in the coming months. Investment in the markets at this time will be rewarded.
As interest rates have now reached forty year lows, fixed income investors need to consider high-quality dividend yielding stocks as fixed income proxies. Additionally, one of the implications of the current financial stimuli will be a short-term increase in inflation, resulting in lower fixed income returns.
What
should investors do at this juncture?
In the past eighteen months, equity investments have lost several trillion dollars. Contrarily, fixed income investors have seen positive investment returns as interest rates have fallen during the same period. Bond mutual funds have performed well during this period as the thirty-year U.S. Treasury bond is now yielding 5.31%.
Current investment professionals are befuddled as many have never seen such precipitous drops in the financial markets. The drop in stock prices can only be compared to the 1973-1974 markets as they peaked in 1973 after twenty years of disinflation.
Current discussions are taking place regarding deflation versus inflation. With the current economic slowdown, economists are finding it unimaginable that inflation would occur in the immediate future. However, Robinson Investment Group believes that as both monetary and fiscal stimuli are felt, inflationary pressures will rise.
Our analysis supporting inflation starts with the current shape of the U.S. Treasury bond yield curve. As you may know, the yield curve is the yield levels for respective maturities for the U.S. Treasury obligations, i.e. 90 days, 180 days, one year, three year, five year, ten year, 20 year and 30 year. Inflation usually comes from an aggressive Federal Reserve policy which drives short term interest rates down while longer term bond yields remain higher as is the case now. Conversely, recessions usually follow inverted yield curves like we had in March, 2000 (short rates were higher than long rates). Evidence that the current economic slowdown is going to be short lived is supported by the low level of short-term interest rates; that indicates a very accommodative Federal Reserve policy.
We are all saddened by the attacks on the World Trade Center and the Pentagon. The political climate changed when these two events occurred as political thinking in Washington shifted from balanced budgets to deficit spending in a very short period of time. Estimates are that $100 billion will be spent just to rebuild the infrastructure in New York City. Another $25 billion will be allocated to rebuilding the Pentagon to make it safer and more accommodative for current and future purposes. The President is talking about spending another $70 billion in special funding to further stimulate the economy. Commitments of $20 billion have been made to ensure the airline industry remains intact. Finally, the U.S. defense budget is going to go up. Estimates for the defense and military increases may top $300 billion as the War on Terrorism is waged. Regardless of the reasons, the stimulation coming from Washington is going to be large and very popular among voters.
Robinson Investment Group, as a result of the current short-term changes at the Federal Reserve and U.S. Government announcements, believes that an economic recovery is ahead. Investment in equity positions and funds should be made as the lag effect from nine interest rate cuts since January, 2001 should positively impact economic activity in the next few months. We believe that 2002 should provide positive returns on equity.
Investors should evaluate their long-term investment goals. The wake up call for September 11, 2001 is that investors must never have all their eggs in one financial basket, nor should they get caught up in overly optimistic investment hype. The “fad” days of 1999-2000 are clearly over. Reasonable investment objectives must be developed and followed. This reevaluation may conclude that an adequate mixture of stocks, income vehicles and cash reserves are more appropriate for the long term.
Finally, investors may need financial experts. If you are comfortable with your current investment advisor, stay with them. Try to insure that your advisor has your objectives in mind and continues to work toward those goals.
Russell L. Robinson
Robinson Investment Group
5301 Virginia Way, Suite 150
Brentwood, Tennessee 37027
615.242.3447