Merriam-Webster defines capitalism as follows: an economic system characterized by private or corporate ownership of capital goods, by investments that are determined by private decision, and by prices, production, and the distribution of goods that are determined mainly by competition in a free market. These defining characteristics allow me, as a long-term investor, to see past short-term concerns. Corporations conducting business in an environment and economy founded on free markets and competition have the tools necessary to maintain profitable margins regardless of other changes such as taxes, politics, and social movements. Well-managed businesses endure less than favorable environments and modify, as needed or required, to continue to compete for market share and bottom-line profits.
This week’s Weekly Market Review centers on banks and their business model for profits. While the current interest-rate environment is less than ideal for lenders; every single bank included in the most recently conducted Dodd-Frank Act Stress Test, passed. If you really want to better understand how this financial stress test works, you can follow this LINK to view the June results. The executive summary in the beginning of the document and Appendix C offer interesting details. Banks, however, are out of favor in the market right now with stock prices roughly 30% below where they were before the COVID crash began in February. There are exceptions, but most all publicly traded banks are well-positioned to manage increased defaults while maintaining their dividends and are positioned to excel once debt default concerns lessen.
Speaking of debts, the already stifling National Debt has increased by a gigantic amount over the last twelve months. The dramatic bailouts and stimulus, passed to combat economic hardships caused by the pandemic, accelerated the already rising debt load. One positive is the interest rates the government is paying are at record lows. Certainly, running budget deficits is something that will have to be addressed, but there is a bit of relativity to consider. Many other countries are also running record deficits and piling up their national debt loads. My investment advice remains the same regarding our National debt. When you own stock in companies or stock-based funds you are not investing in the government, but rather those publicly traded companies conducting business in the free-markets. The same goes for bonds unless they are government bonds. Despite the National debt, the appetite for those government issued bonds remains very strong. US bonds are regarded by the world as a very safe investment. The fact that the US dollar remains a dominant currency around the world underscores the continued demand for US Government bonds by foreign buyers. Again, relativity come into play; as low as our interest rates are, they are even lower in many other countries.
As long-term investors, we can’t allow the things we don’t know for sure prevent us from good decision making regarding the things we do know for sure. I know that a well-diversified portfolio of good businesses will become more valuable over time, even if I have no idea what to expect over the next few months.
As always, we hope you find the Weekly Market Review both informative and interesting.
Trevor N. Coe, CFP®