Up,
up, and...which way?
It's
an unfortunate fact that much of last year's market performance was influenced
by attitude, fear, and opportunism versus a strong reliance upon fundamentals
and discipline. Encircled by business
disruptions, massive unemployment, and even death, many investors succumbed to
anxieties or overwhelming despair and sold out completely or just sat back and
watched in disbelief as world events unfolded around them. From the depths of the market's sell-off to
the heights of all time records, incredulity abounded. However, we feel that a return of confidence
is in the offing.
Above
all, the will to thrive has not been defeated.
Although the recovery from the ravages of the Covid virus might be
difficult, businesses still make it their mission to attain profitability and
sustainability. The task might take
longer than our patience is willing to allow, but the end result is entirely
within reach. In specific sectors, such
as healthcare and technology, the recovery is already robust. Earnings in those shares are advancing faster
than anticipated. In fact, many segments
of the economy are gaining market share...a testament to their will to succeed. Interestingly, the last few weeks of 2020 saw
a wave of profit taking in overpriced stocks followed by reinvestment into
sectors and shares of more “traditional” names that had been ignored during
much of the value-buying frenzy.
Markets
Being
that willpower is an element to any business equation, the reality of the next
few quarters is that the backdrop really
is different this time. Investors must be prepared to accept a
slowing upwards trajectory in one area, while fulfilling new expectations in
others.
Bear in mind, though, that unless there is a significant reorientation
away from emotion and fear, and back towards fundamental analytics, there is a
likelihood of slippage once again.
Disruptive
economic convulsions might take days or months to explode upon the landscape,
but their repair almost always takes years in the aftermath. Associated fissures develop....in this
instance, uneven distribution of deaths from the virus within certain
communities...which add to the duration of the event. Some populations are well
equipped to flourish during crises while others have the proverbial deck
stacked against them. Inequity abounded
even before the pandemic. Let's not
pretend that social and economic inequality hasn't persisted for decades.
Everyone
assumes, for example, that the vaccine is the “miracle cure”, one whereby the
disease is eradicated and things return to normal. Unfortunately, we have already seen some
unevenness in the distribution of the vaccine....an issue that we hope is only
temporary. Nor are forecasters
predicting an immediate resumption of 2019-type economic expansion; more likely
not until the latter part of 2021. Most
of our data shows significantly slower growth in the first two quarters as the
nation...and the globe...deals with issues of population dislocation, high
unemployment, political deadlock, and emotional and financial
insecurities. In other words, there are
no quick fixes, nor are there any regions that are unaffected by the pandemic.
The
world does not stop functioning while we lick our Covid wounds. There is much to do to enhance the quality of
life including ecology, infrastructure,
personal security, healthcare, technology, education, and eradicating hunger
and poverty. While the disease may
have occupied our immediate attention, the capacity to nurture our planet and
our fellow citizens might have been strengthened as a result. The weakest and poorest amongst us have been
disproportionately afflicted, so it will take the most able-bodied to do some
of the heavy lifting initially.
Corporations and nations with the resources to do so must coalesce
brainpower and money to lead the way.
Public and private sector alliances have always been the benchmark of
problem solving in decades past, replenishing capital, supply chains, jobs....
and hope.
We
believe in globalization and multilateralism.
As noted, all regions of the planet have been affected by virus and
economic stagnation. The virus knows no
borders or political affiliation. Thus,
nations and multi-national corporations must integrate their endeavors to
bring our common purpose into
focus....to rebuild roads, supply our hospitals, clean our air and water, feed
the hungry, educate the unfortunate, and to replenish optimism through
innovation and investment.
The
financial establishment must also soul-search and reprioritize their persuasion
over how capital is formed and used. A
significant element of that task is understanding how the rotation of
leadership in sectors influences the deliberateness with which people trade
their affairs. Encouraging competition and fair access can close the
exponentially widening gap between those who have the resources to succeed and
those who aspire to participate, but heretofore have been left out of the
conversation. There cannot be a global marketplace if more than half the world's
population is excluded from contribution, suffering from famine, under the
siege of war, dislocated, or too poor to attempt. Each day, those macro things which bind us as
“persons” seem to be subjugated to the narcissism of the few. The world doesn't
only exist during trading hours of the Dow Jones Industrial, DAX, or CAC
exchanges. While the rich get richer, the poor are indeed
falling further into poverty.
Overcoming
those financial and social conundrums requires capital, discipline,
forethought, cooperation, and patience. Our
most successful portfolio investment disciplines at Alexander Capital are
predicated upon earnings acceleration
driving asset prices forward. Unfortunately, we see the valuation spikes at
the end of last year as outpacing, on the whole, the ability of company's
earnings expansion to sustain those lofty prices. Creating economic continuity was highly
constrained in the past year by the scourge of sickness and death, yet market
valuations soared across the board. This
is noteworthy because customer purchasing demand was restricted and limited
only to a few highly visible sectors (pharmaceuticals, technology, consumer
staples). A good portion of the price increase
in the financial bourses was as a result of excessive speculation and value
hunting. A slower economy should
actually have restrained market trading, but instead the old adage
that “Wall Street is not Main Street” rang truer than ever. Once again, greed laid bare the gross inequality
of the rich versus the poor.
We
doubt that anyone facing eviction, furlough, unemployment, standing in line at
a food bank, lying in a hospital bed, or mourning the death of a loved one
gives a damn about anyone else's “big score” in the biotech sector....
Conclusion
If
2020 hasn't demonstrated the precariousness of life and that the future is
unpredictable I'm not sure what will.
Although no one can accurately envisage what will happen going forward
we must be cognizant that change and luck will always play a role in creating opportunity
and other ways to adapt to unforeseen extremes.
One might be proven to be "correct" in hindsight, but having
an effective process ahead of time, whereby decisions are made based upon data
and strategy, reduces the impact (magnitude) of negative exogenous forces upon
the desired outcome. This is something
we believe we did most effectively for our clients prior to the onset of the
pandemic.
There
is a high correlation between low interest rates and robust equity
markets. The options for investing
presently, besides stocks, are few.
While we would always prefer multiple alternatives to investing
exclusively in stocks, conditions are sufficient to provide adequate structural
safeguards against dangerous valuation pullbacks in the coming quarter. Our hope is that a new political and social dynamic
will foster more robust confidence and capital investment.
Portfolio
building is not wishful thinking...it is hard work. The effort one puts in before the crisis so that
you don't have to dig out afterwards is the unseen and often underappreciated task. We feel reassurance in the fact that we
looked into the abyss this past year and were able to rally with our assets,
our lives, and our aspirations intact.
We
are urging more of the same, with a strong tactical weighting in ready money
early this year in anticipation of a resolution to the virus crisis and an
outsized opportunity for the socially responsible themes we highlighted in this
missive. We want to stress, again, that allocations into savings and cash are
not a “default” decision when managing portfolios but, rather, an active and
prudent way of defending against unforeseen destructive events.
A
page has, indeed literally and figuratively, been turned. The markets are hungry now for initiatives
that sustain and enhance the social compact, and reasons to believe that the
worst is behind us.
Suggested
balanced account asset allocation, Q1, 2021
Equity: 47%
Fixed
Income: 15%
Cash: 38%
