As we begin the new year, we think about the important task of implementing a well-thought-out and diversified‑asset‑allocation plan for your wealth. The Cabot team has discussed this with our clients and has laid out what they believe is a thoughtful and appropriate asset allocation for your wealth. We believe spreading your hard‑earned assets over multiple asset classes like equities, fixed income, real estate and hard assets (e.g., land and gold or precious metals) is a very sensible approach to creating a smooth path toward asset growth. Specific asset classes perform differently during various parts of the business cycle – thus insuring you should always have some assets that are performing well. We do tactically increase and decrease allocations based upon our specific research; this can at times help reduce volatility by allocating more funds to areas that are out of favor and have lagged in performance. Today, a good example of out-of-favor markets are emerging-market equities and developed-international equities. These have performed poorly for the past 8-10 years. Additionally, gold and precious metals have performed poorly over the last decade. We believe these specific areas offer higher than average opportunity today.
Markets are elevated in value today by the simple fact that interest rates are low on an absolute basis. The ten-year U.S. Treasury bond today is 1.79 percent. This rate is low and is impacting the values derived in all other markets, especially the stock market. Bonds are simply no competition for equities today. Interest rates are low for structural and demographic reasons (aging populations) and because central banks are manipulating the fixed-income markets with their extraordinary buying in those markets. As long as this condition remains, we will continue to watch equity values rise. Given today’s low rates, I believe we could have even higher values justified in our equity markets. History has shown that price earnings (p/e) multiples in the 20‑22 range (today we are at about 19 times earnings), are common when interest rates and inflation rates are as low as they are now
The second important factor in today’s markets is the extraordinary innovation we are witnessing in nearly all sectors of our economy. High powered computers and smart software – (some call this artificial intelligence) are creating amazing innovation in all areas of our economy. There are many imminent innovations in transportation, energy management and alternative power (wind and solar power), healthcare with the power of genomics, communication services with 5G and the next powerful phase of growth in the Internet, utilities in the way power will be delivered to our economy, and many other industrial innovations in the use of robotics and automation. I am confident that our future is a bright one with many advances in efficiency and progress. In our research work we focus a great deal of attention on the new innovative sectors of the economy. We believe this is a sound way for us to grow your capital in the coming years.
2020 will be an exciting year of unique challenges and opportunities. The future is filled with uncertainties; however, we believe 2020 will be a period of progress for our economy and markets. The Cabot team will strive to make the most of these opportunities.