In a year that offered a pandemic and an election as reasons for investors to bail on risky assets, 2020 turned out to be a great year for those that stayed the course. A 60/40 portfolio of diversified stocks and bonds increased by a double-digit percentage, exceeding expectations.
We believe that bond investors should use the benefits of a stable rate environment to buy yield on the short to intermediate part of the yield curve. Stock investors have a more complicated task in 2019, albeit less so now that the Fed has indicated it is not hiking interest rates and will end the reduction in its balance sheet assets by October.
With unemployment below 4% (considered full employment by the Fed) and wage inflation pressure still positive, the Fed will want to continue to remove the stimulus from its policy. This means continuing to hike interest rates, albeit it at a reduced pace from the last two years.
Bond investors are feeling a little shell-shocked after the rise in interest rates in November.
Last week, the Federal Reserve released some information about the U.S. economy’s capacity utilization and industrial production (these numbers are released together).