One question we anticipate clients having over our next group of scheduled quarterly meetings is if Delegate thinks that stocks will outperform bonds over the next cycle, then why isn’t Delegate recommending that its clients sell bonds and buy stocks right now?
It’s the right question to be asking, and the answer boils down to the time frame. While we think stocks will generally outperform bonds over the next cycle, which we see as 7-10 years, we believe that the current entry point for equities does not present an attractive risk/return profile for investors. Said differently, with the recent market run-up, we think stocks are too expensive right now, especially given the uncertainty present in the global economy and corporate earnings due to COVID-19. Uncertainty in corporate earnings is especially high due to the lack of forward guidance provided by companies.
So, what is an investor to do? The answer is to be patient, wait for more attractive entry points, and rotate from bonds to stocks over time. This could be 12 months, it could be 36 months. An example of a more attractive entry point occurred in March, when we recommended that our clients move slightly towards their investment policy targets in equities. Since then, equity markets have recovered sharply to a point where we believe that they are overvalued. Next time a buying opportunity presents itself, we will likely recommend another portfolio adjustment.