While we have remained focused on the winners in the new normal which are predominately growth stocks, we recently added some industrial commodity, gold, and moderate growth-high dividend-paying companies to our portfolios.

The market challenges our core beliefs at times. This was such a week where our tech holdings corrected; but fortunately, the industrial commodity, gold, and moderate growth-high income payers really outperformed. Ironically, we were asked this week by a client to comment on the debate around whether growth stocks, like technology, were overvalued, since they have outperformed for so long, relative to value stocks.

It was a great question and takes us back to reviewing and then challenging our core beliefs along with valuation. Fortunately, we have had the benefit this week of listening to earnings calls from the top execs at JP Morgan (NYSE:JPM), Bank America (NYSE:BAC), Citibank (NYSE:C), Pepsi (NASDAQ:PEP), JNJ, and a few others on all the salient topics facing us as investors. Key topics discussed were the economy, the Fed, government stimulus, the financial system, and obviously, the coronavirus. We also heard from Dr. Fauci and heads of research at key firms working on vaccines and therapeutics.

We always begin with a view towards liquidity. There is far more liquidity being added to the financial system by the Fed and the government than is needed by the economy therefore it is pushing investors further out on the risk curve. Virtually every corporate executive commented that this is anything but a normal economic cycle as you have huge increases in reported income, deposits, savings rates, housing starts, and many other things that normally do not occur during a downturn. Yes, the Fed and the government stimulus programs are providing a bridge to the other side has been key. While everyone felt that the economy had bottomed, all of them said that it will take over two years to fully recover to pre-pandemic levels. The bankers acknowledged that there will a tremendous number of casualties along the way which is why their reserves rose in the quarter to levels never seen before. Everyone concurred that the short end of the yield curve will remain ridiculously low which will penalize bank spreads and earnings.

Their conclusion and ours, too, is that we will have a slowly improving economy over the next few years impacted by how soon therapeutics and vaccines are readily available; the yield curve will slightly steepen which means to us that the 10-year treasury may not even reach 1.5% from 0.6% now for some time; bankruptcies will increase, and the government will remain all in.

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Remember that the stock market multiple has been historically priced off of 10-year treasuries plus a risk factor. While we see many bankruptcies, the banks are well prepared and overcapitalized which translates into low financial risk. Yield spreads have continued to narrow which is an indication of low financial risk is in the system. A 10-year treasury even at 1.5% plus a risk factor of 2.5 which is on the low side but deserved for reasons stated above translates into a potential 25 market multiple.

While we are upset by the continued increase in the number of coronavirus cases over the last week, it has finally forced states to mandate the wearing of masks, maintain social distancing, and utilize contact tracing. Companies are leading the way by limiting, if not postponing, office openings, and doing an extraordinary amount of testing. Stores are leaning in, too, mandating that all employees and customers wear masks and adhere to proper social distancing. The bottom line is that we are within weeks of the rate of change in the number of cases. We continue to hear promising news on therapeutics and vaccines which only increases our confidence that both will start being available this fall but it will take many months until broadly available and probably not until 2022 for all of us who want to be vaccinated to be. JNJ was very confident that we will have both in record time. But that does not change our view that it will take until the end of 2022 to return to pre-pandemic economic levels. Thank goodness, our medical practitioners have learned how to better handle the virus, significantly lowering the death rate.

Our economy has bottomed but the improvement will be uneven. For instance, the rate of gain has already slowed from June’s growth due to more outbreaks in California, Texas, Florida, and other key states. We need our government to agree and implement on a timely basis a stimulus program to carry on for the foreseeable future after the Cares Act expires within just two weeks. We hope that the plan comes in between $1-1.5 trillion which should be enough. There is no question after hearing from several Federal Reserve officials last week that the Fed will keep their feet to the floor providing all the liquidity needed to keep the system afloat with extraordinarily low rates, buying everything in sight. We agree with the heads of all the major banks that the recovery will not be a V; provisions will remain at these levels for a while longer; there will more bankruptcies, and you will not see the true impact from the pandemic until stimulus ends. Again, it will take a full two years for our economy to recover.

Before we get back to our core beliefs and growth vs. value, we want to make a few comments on the election. While Biden widened his lead last week, we do expect the race to tighten as we get closer to the election. Trump needs to thread the needle to win which means very good news on both the virus and the economy at a minimum. Could it happen? We don’t think so. It may also hinge on school openings in the fall. Right now, it remains iffy. One good thing is that Trump has apparently backed off on sanctions against Chinese officials (for now) and can point to the record level of soybean and corn orders recently placed to achieve agreed on the upon levels in the Phase 1 trade deal. Unfortunately, we are not impressed with Biden’s agenda but that may not matter in the end. Stay tuned.

Investment Conclusions

Liquidity drives markets. That has been and remains our number one core belief. Another core belief revolves around the monumental and permanent change in mindsets regarding spending more time than before. This has tremendous ramifications for investing. Our third core belief is to invest where the wind is towards your back, avoiding areas where the wind is in your face. We also like to invest in companies whose margins are improving. Companies are using the pandemic as an excuse to substantially reduce costs which will lead to higher margins on the other side. PPG just reported surprisingly strong results despite weak volume because they cut costs so aggressively. This will an important theme to watch play out as the market reacts favorably to rising margins.

We remain in a very favorable environment for risk assets which includes stocks, industrial commodities, and gold. We continue to avoid all bonds as we expect the yield curve to steepen as our economy improves, albeit relatively slowly, after a huge fall-off due to the pandemic and inflation moves up. Remember that there is over $5 trillion in cash and money market funds sitting on the sidelines ready to go. Plus, we expect investors to reduce their bond exposure. Where will much of these funds go?

Now let’s look at growth vs. value. There is no reason that you can’t own both as a barbell approach to investing. We put together a value list a few weeks ago to compliment our sustainable, high-growth portfolio. Each one of these companies has moderate growth plus dividend yields over 3.15% and we expect the dividends to increase along with earnings. Our growth companies are tied to the new normal and will have an acceleration in earnings growth, from already high levels, as every home becomes a workstation. These companies, which have done great to date, are still undervalued using earnings yield calculations relative to bond yields-a key Buffett tool. These companies are also undervalued using typical earnings discount models.

Remember 10-year treasuries are 0.6% today although we are forecasting 1.5% in 2.5 years. You can pay a huge premium for real sustainable growth above 15-20% in today’s world. These companies generate a ton of free cash, too. Finally, many of the great tech growth companies have businesses embedded in them that are not fully valued such that the sum of the parts far exceeds the whole.

For instance, Cisco (NASDAQ:CSCO) owns the largest video conferencing company; Amazon (NASDAQ:AMZN) owns the largest cloud company; Google (NASDAQ:GOOG) (NASDAQ:GOOGL) owns the largest driverless car company, and Facebook (NASDAQ:FB) owns many diverse social media sites. Breaking any one of them up could create much more value than their current market prices. Just look at the action in Dell this week after they announced that they may monetize their VMware (NYSE:VMW) holdings.

Many of the value companies that we have selected have also benefitted from the pandemic like General Mills (NYSE:GIS), Home Depot (NYSE:HD), and Pepsi. Our expectation is to earn a conservative 9-14% including dividends in these stocks over time in line with their growth. We intend on using covered calls to enhance returns and to minimize risk, too.

The bottom line is that it all comes down to stock selection and valuation. Each investment is evaluated on its own merits. We have finally entered a period where active portfolio management will outperform passive management. Sorry, Warren.

The weekly Investment webinar will be held on Monday, July 20th at 8:30 am EST. Remember to review all the facts; pause, reflect, and consider mindset shifts; look at your asset mix with risk controls; turn off your cable news; do independent research and… Invest Accordingly!

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Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.