Potential action by central banks around the world continues to be on the mind of investors. Throughout the summer, interest rates remained low with many countries still experimenting with negative rates. In the United States, the Federal Reserve continues to lay the groundwork for another rate increase, but inconsistent economic data and a skeptical market have kept them on hold. We still believe that a rate increase will only occur when the economic data supports it.
Our view on the stock market has not changed. As long as central banks continue with policies supporting historically low interest rates, we continue to believe equity markets are the best place to invest. Company managements continue to focus on increasing shareholder value through increased dividends and stock buyback plans. We remain invested in companies with strong balance sheets and a proven ability to manage through uncertain times. It is still our view that these are the companies that will lead the market over the next few years.
It is impossible to forecast precisely how the markets will react as the make-up of the legislative branch will be just as important as who wins the Presidency.
However, with short-term interest rates near zero, investors are bidding up riskier assets in their search for income. We are noticing pockets in the equity market where high dividend stocks are climbing as investors reach for yield. The concern is that this part of the stock market may be significantly impacted if rates rise as they are now trading as bond substitutes. Although these stocks can stay elevated if interest rates stay low, many investors do not fully understand the risk. This is an important factor in our analysis when considering where to invest and where to take profits.
It would be impossible to write to you without commenting on the upcoming presidential election. This is an unprecedented time in our political history. Regardless of who wins, the country remains deeply divided and many voters will be unhappy with the outcome. It is impossible to forecast precisely how the markets will react as the make-up of the legislative branch will be just as important as who wins the Presidency. Due to this uncertainty, it is our view that the election may cause some short-term volatility as voters digest the results. With this in mind, you may notice that your account may hold additional cash or short-term investments until we can assess the results and possibly take advantage of any significant market reaction.