The quick stimulus actions by Congress and the Federal Reserve in the early stages of the pandemic have thus far succeeded in stabilizing the economy and the capital markets through the injection of large amounts of cash. As we detail in our Economic Overview, the equity markets have not only recovered, but have also notched record highs. The surge in equities has led to lofty valuations, while yields on fixed income investments remain near historic lows. This begs the question: What should one do with excess cash?

Do something for yourself. The last six months have been a challenge for even the most optimistic among us. The daily news cycle is relentless, filled with pandemic case numbers and deaths, hazardous air from wildfire smoke, a divisive political environment, and social unrest. Some consumers have exchanged their vacation budgets and gym memberships for Pelotons and puppies. Purchases such as these are geared toward providing a mental and emotional break during these challenging times.

Pay down debt. During periods of uncertainty, it is important to examine the liability side of one’s personal balance sheet. One way to improve cash flow as the economy rebounds is to use accumulated cash to pay down debt burdens (student loans, automobile debt, etc.) or utilize the lower interest rate environment to refinance.

Buy stocks. Despite the high valuations in the current equity market, there is still a compelling argument to participate in the capital markets. We anticipate short-term volatility in the stock market as the economy regains its footing. Still, the years will benefit in the short term from the dividend income, and in the long term from the realization of future growth opportunities. There also are sectors of the economy that remain attractively priced relative to their pre-pandemic valuations. While these sectors may be priced attractively due to the business challenges they face in the near term, prospects for a vaccine or therapeutic solution increase the chance that revenues in those sectors will return to pre-pandemic levels.

Buy bonds. Interest rates are unquestionably low, but bonds are still an effective safe haven for cash without volatility in price movements. Bonds can be used as a store of liquidity for cash flow needs in the short term without fear of their value evaporating in difficult markets.

Investigate alternative investments. Since the stock and bond markets we have traditionally utilized for investment allocations are expected to remain challenged in the short term, we believe now may be the time to look for ways to generate return beyond these traditional investments. We are in the process of analyzing strategies that would be considered “alternatives” to traditional stock and bond securities. These investments typically relax one or more of the constraints Nelson Roberts has historically applied to security selection. This could mean including the use of derivatives or relaxing liquidity constraints in order to achieve attractive risk/return profiles. Alternatives would make up a small allocation to a client portfolio, and they are not appropriate for all clients. We would solicit the approval of clients prior to implementing an investment in an alternative strategy.

Individual investment positions detailed in this post should not be construed as a recommendation to purchase or sell the security. Past performance is not necessarily a guide to future performance. There are risks involved in investing, including possible loss of principal. This information is provided for informational purposes only and does not constitute a recommendation for any investment strategy, security or product described herein. Employees and/or owners of Nelson Roberts Investment Advisors, LLC may have a position securities mentioned in this post. Please contact us for a complete list of portfolio holdings. For additional information please contact us at 650-322-4000.