Doug Drabik discusses fixed income market conditions and offers insight for bond investors.
Emotions are always high around an election as people get very passionate about their beliefs and politics. It is easy to get caught up in the rush and reporting high in media blasts, controversies, attacks, facts, exaggerations, hype, conspiracy theories, backings, excitement, and drama. That can be fun and even informative at times but should elections have any power over your fixed income investing rationale?
Fixed income allocations are typically long-standing plans which are influenced by the fundamentals of the market and long term economic outlooks. Temporary dramas and momentary happenings may influence day traders and/or total return seekers but not buy-and-hold investors whose fixed income allocation has a primary purpose to protect principal. The known commodities of fixed income (cash flow, income and return of face value) remain unaffected to outside noise as long as an investor holds to maturity and there is no default.
This election is unfolding to look as if Congress will remain split between parties. This adds to the argument that status quo will likely prevail over sweeping changes as the split keeps checks and balances in place for any extreme policy proposals.
The Fed (U.S. central bank) has clearly taken a major role in shaping the markets. Theoretically and in practice, the Fed makes choices independent of government influence. Regardless of Washington’s make-up, the Fed will continue on its course, not that of any White House administration.
This morning serves as a testimony to a bond’s relationship to the fundamentals. Pfizer announced a vaccine said to have an effectiveness of 90%, far greater than the expected effectiveness range of 60%-70%. The significance suggests a potential long term solution to a pandemic that has forced this nation into a recession. Long term positive prospects can allow a recovery to pre-COVID type economics.
There are always nuances to consider. Elections can influence tax laws but investors are always attentive to their personal tax situation and whether tax-exempt products benefit them. A higher percent of tax payers in higher tax brackets could raise the demand for tax-exempt municipal bonds. Although, as mentioned above, if the Senate remains a Republican majority, the likelihood of any large-scale sweeping changes is suppressed.
At the end of the day, investors need to plan their fixed income allocations based on their own personal needs. Long-term goals of principal protection and retirement are unscathed by changing political seats.
To learn more about the risks and rewards of investing in fixed income, please access the Securities Industry and Financial Markets Association’s “Learn More” section of investinginbonds.com, FINRA’s “Smart Bond Investing” section of finra.org, and the Municipal Securities Rulemaking Board’s (MSRB) Electronic Municipal Market Access System (EMMA) “Education Center” section of emma.msrb.org.
The author of this material is a Trader in the Fixed Income Department of Raymond James & Associates (RJA), and is not an Analyst. Any opinions expressed may differ from opinions expressed by other departments of RJA, including our Equity Research Department, and are subject to change without notice. The data and information contained herein was obtained from sources considered to be reliable, but RJA does not guarantee its accuracy and/or completeness. Neither the information nor any opinions expressed constitute a solicitation for the purchase or sale of any security referred to herein. This material may include analysis of sectors, securities and/or derivatives that RJA may have positions, long or short, held proprietarily. RJA or its affiliates may execute transactions which may not be consistent with the report’s conclusions. RJA may also have performed investment banking services for the issuers of such securities. Investors should discuss the risks inherent in bonds with their Raymond James Financial Advisor. Risks include, but are not limited to, changes in interest rates, liquidity, credit quality, volatility, and duration. Past performance is no assurance of future results.
Stocks are appropriate for investors who have a more aggressive investment objective, since they fluctuate in value and involve risks including the possible loss of capital. Dividends will fluctuate and are not guaranteed. Prior to making an investment decision, please consult with your financial advisor about your individual situation.
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