Market Commentary for the week of April 26, 2021

Fool's mission

We keep reminding clients that volatility  is a two-edged sword.  It would be wrong to define that word only by its pejorative “downside” connotation.  Volatility also applies to manic upside spikes which, while profitable for your portfolio, might also have unintended consequences such as additional risk or unnecessary imbalances, later on.  We prefer to look beyond bottom line benchmarks and track records to uncover new ideas that will have positive impact not only for portfolios but for the economy-at-large.

One year in, and it is becoming clearer how the effects of the pandemic wreaked both health and economic havoc upon consumers, governments, and corporations.  Even more obvious is how these imbalances disproportionately spread...by sector, demographic, and geography.  Those cyclical businesses that were hardest hit could be shuttered forever.  For those purveyors there was no “Plan B”.  The asymmetries of the devastation was shocking.  The wealthy maintained while the poor fell further behind.

The magnitude and breadth of the crisis was greater than any in the last century.  While the S&P might currently be trading at or near all-time highs, many are in the midst of the greatest economic crisis they will ever know.

In an era of globalization and expanding opportunity, making capital available to consumers is about more than keeping interest rates (borrowing costs) low.  It is about demonstrating compassion by helping the public tackle the real, everyday problems they face and providing services and solutions which exhibit personalization and customization to their needs.  As with most things, it is all about perception. Unfortunately, we witnessed too much of mass production, marketing, and self-indulgence in a game of survival of the fittest.  Such is the nature of business when everything is on the line.

Big picture

The market and the economy are  recovering.  It might take time fully to re-imagine a post-viral world, however.  Measuring one's progress versus a pre-pandemic paradigm will prove to be problematic.  The data is not conclusive about who, or how, the spoils of a new normal will be allocated.  But there is a disturbing undercurrent that what happens next for some may not be what happens for all.   For those most disadvantaged by the past year, those most vulnerable now, the ravages of the economic and health crisis is punishment enough.

The pandemic has shown us that businesses and institutions that rely upon impersonal algorithms, in which it is acceptable for some to fall through the cracks in the system, can't  be trusted to do what is right for their broader community.  Trying always to squeeze the last dime of profit out of every situation is oftentimes un-empathetic, and should be uncharacteristic, we believe, in a post-Covid business plan.  We favor earnings potential from corporations that specialize their approach to their clients.  These networks of responsible citizens will raise staggering amounts of new capital in the coming years, with expectations high that they will succeed for their, and our, benefit.

Boardroom competency will be most acute in industries where human need   trumps unashamed greed ...industries such as housing, medicine, agriculture, energy, and education.  In many instances, the dilemma lies not in the supply side of the equation, but in the delivery network of those supplies.  New initiatives must take on a beginning-to-end outline so that their consumers are serviced comprehensively.

As the economy rebuilds, we will be looking for signs of breakthrough and capital expenditure in alternative energy, agronomics, technology, and other areas with staying power for the future.  Fixation only upon the current cycle or mainstream performance barometers is a fool's mission, and destined to lose sight of the real opportunity that presents itself upon our horizon.

Market Commentary for the week of April 19, 2021

 

To get the right answers....

The markets turned their attention to quarterly earnings results last week, beginning a new chapter confirming which sectors will or have been leading and which will disappoint. And while the past twelve months radically changed habits, perceptions, and experiences, we expect that economic growth will continue to rebound.  The trajectory of layoffs is receding, while some “sequestered” corporate and personal cash on the sidelines began last week to infuse into the retail markets.  Finally, as the weather begins to improve there should be a spillover effect into our collective psyches.  Overall, the week was capped off by more mileposts in the industrial and financial sectors.

There remains some concern however that low interest rates continue to fuel the rush to buy stocks during a time in which there are few investment alternatives for consistent return.

In the wake of a horrific Covid experience, traditional portfolio allocations, like the customary 60/40 split, have been upended forcing portfolio managers to reconsider their convictions and attitudes about what constitutes risk management in the short and long term.  As government steps in with additional fiscal packages the landscape of economic permutations is changing constantly.

Identifying these new probabilities is not as straightforward as “do I buy, sell, or hold?”   Managers are compelled to look at market valuations and risk mitigation through the eyes of the "human factor" more than ever before, and to determine a timeline from which the prospect for success can be stretched out.

We see a multitude of industries poised to capitalize on this new timeframe, including renewable energy, healthcare, food and agriculture, infrastructure, and biotechnology.  Modernizing their efficiencies, these industries should impact positively upon the economy as well as portfolio capital appreciation expectations.  No doubt that the tailwinds now developing from the past year are changing the equation for companies aligned with a “new normal”.

.....you must first ask the right questions

Making a portfolio bulletproof from outside influences is akin to dodging raindrops during a storm.  Putting money to work involves quantifying internal (subjective) alongside external (objective) data.  As noted above, the world changed radically last year for most of us, primarily due to those "external" factors imposed upon us (virus, disease, death).  As a result, not having the right investment strategies or risk controls in place put a huge sum of capital in jeopardy.  The recent resurgence in equity valuations creates a new reckoning that must be considered: are the financial markets at a significant inflection point of hyper-valuation or can the linear price recovery continue unabated?

The answer is allied to one's time horizon, risk profile, and intrinsic investment methodology.   

It would be simple to dismiss the question altogether, but because the answer involves mathematics, facts, theory, execution, and emotion it becomes critical to appraise all the components synergistically.  This we know to be true: time is one of the single greatest variables attributable to portfolio expectations and success.   It is crucial not to compare portfolio progress to the evening news or a neighbor's braggadocio.   These comparisons become irrelevant and not at all related to how comfortable you feel  about your own prospects over time.

In a year marred by fifty percent pullbacks and fifty percent recoveries, my metrics only saw excessive volatility, excessive risk, and poor strategic planning.  Going forward, our attitude is that the economy and the financial bourses will always give us reason for optimism and something to buy.  Being distracted by everyday stressors deflects from the mission at hand....to rebuild confidence and to plan for the long term.

Market Commentary for the week of April 1, 2021

Undercurrents

No doubt many of you have seen and read many articles about how the pandemic is receding, vaccinations are multiplying, and what the economy will look like in a post viral world.  Indeed, the data are improving.  The question now is, “will the world, the markets, our lives be appreciably different when the uncertainty ends?”

Our frequent mantra to you is that life moves in cycles.  Without question, 2020 traversed the right hand side of a downward parabola.   In hundreds of thousands of cases the ultimate price was paid.  Overwhelmingly, the world did not get better during the past 15 months.  Job losses, wealth inequality, healthcare disparity, social justice discrimination, investment disequilibrium, and vast human suffering are not a formula for confidence, sociopolitical functioning, or wealth building.  And yet, the markets are continuing their remarkable rebound.  Is the path forward equally as munificent?

We believe that the unfortunate lessons learned and the steep price paid will improve the prospects for our quality of life.

Markets

This past year, in particular, taught us how to mobilize capital and human resources to deal with crisis as no other time in the last 100 years.  The challenge was met head on by the private sector, government, the military, and individual volunteerism interwoven together.  Dealing with only one of those issues alone would have been daunting enough, but society was forced to blend solutions to all three (financial, health, social) at the same time.  No one would blame you if you wanted to wish-away the whole experience, but we will be better off in the long run because of them.

The upwards-side, left half of the parabola always follows the dreaded “right side decline”.

We must first acknowledge and appreciate that if we can survive Covid we can survive most anything.  Relationships with family and friends are critical to a balanced approach to life.  Similarly, portfolios rise and fall with economic cycles...that is to be expected.  But a patient, positive mindset helps to cope with uncertainties.

One of the sectors which flourished during the shutdown was Technology.  The transition to digital was well underway even before the virus.  But the internet and interconnectivity became the new default.  Whether purchasing online or speaking with one's physician, the web became our way of scaling back the magnitude of losing direct human contact.  Work is now wherever we happen to be.  The same for education.  Mind you, these are not replacements  for human interaction, they are supplements to it.  A great academic once said. “50 percent of success in life is just showing up”.  But there is no question that cost and time efficiencies were revealed, and improved, by the proliferation of technology.

Another sector to thrive during the crisis was healthcare.  The brave workers in hospitals, laboratories, clinics, factories, and pharmacies ushered us back from the brink of exhaustion.  There would have been no recovery without them.  And many of them would step into the breach again if called upon.  They knew the risks and still assembled to help get our lives back.  Their efforts developed therapies, medicines, methods, and hope for dealing with future health crises.  What once took decades to learn took just months in this instance.  Breakthroughs were more than just coincidences.  Their efforts shattered the hierarchies of institutions and delivered solutions directly to us.  They revealed to us how much can be accomplished with a plan, confidence, trust, and mental/physical endurance....perhaps a metaphor for good investing as well(?)

Ultimately, reliance upon facts and science was a distinguishing feature of the pandemic.  Opinions are valid, yes.  But more instructive is to see how overcoming obstacles is as much a function of leaving one's personal silo and being open to new ideas that prove verifiable and effective to solving a problem.  Sometimes the biggest menace to scientific method is unrestrained human emotion.

And now we enter an era in which more of that herculean effort is required...by all of us.  No one is asking you to sacrifice what you already have, no one is coming to take anything away from you.  Rather, the future of the planet's air, water, food, security, and vigor represents not only an investment option from which to choose but also a covenant with the other travelers aboard the sphere.  If ever there was something to pass along to the next generation, beyond your individual concerns about tribalism, fiscal and monetary policy, debt, and political persuasion, perhaps now is the time to mobilize that effort.

Strategy

The last period of significant negative magnitude for the investment markets was the Great Recession of 2008.   Lockdowns occurred, as now.  Unemployment rose precipitously, as now.  Stock valuations suffered, as now.  Politics and the private capital markets helped pave the way to new capital initiatives, as now.  And optimism slowly began to course its way back into the bloodstream of the capital markets, as now.  Parabolic curves and historical comparisons are relevant only because it is crucial to remember that when all the world goes “micro”, the solutions are most often in thinking “macro”.  This is easier said than done, but vital to understanding that pain is relative, crisis is temporary, and success is almost always around the corner.  Once again, life is cyclical, from beginning to end, and experience teaches us how to live through the difficult periods and to appreciate with joyfulness and gratitude the bounty we aspire to.

As prematurely optimistic as it might seem, our analysis is confidently predicting the “other side” of the parabola.  We are not guaranteeing anything, we are measuring the probabilities.   The other side of the pandemic can be inspiring because of the unlimited potential and opportunity that lies ahead...in Technology, Healthcare, Energy, Infrastructure, Food and Water, and Commerce.  A generation of younger adults who emerge from this horrific period will be motivated to clean up the mess they inherit.  They have the need and the will to thrive and to make better the situation that they will own.  An urgency exists to galvanize the “next” industrial revolution.  Innovation is the distinguishing characteristic of developing that which is currently unknown.

Our portfolio allocations for the coming quarter reflect that sense of cautious optimism. 

Conclusion

The first quarter of 2021 put us back on track from a tumultuous 2020.  It demonstrated that the way forward most likely won't look anything like the years which preceded us.  There is now an uncanny opportunity to make money and make a difference at the same time.  Currency is now channeling into investments that lift citizens and provide superior investment returns.  In the past, it was thought that these socially responsible strategies were neither organized nor effective.  Today's marketplace shows just the opposite: that capital, methodology, portfolio allocation, and optimal performance have never been more integral and interconnected...and more challenging.

Business can no longer prosper without rethinking and reconstructing their own models and methods.  Understanding the underlying purpose of being in business....to provide for the well being of consumers they serve....is how the next few quarters, and years, will unfold to maximize the new macro for clients, financial markets, and the world-at-large.

 

 

Suggested balanced account asset allocation, Q2, 2021

Equity:                 57%

Fixed Income:     28%

Cash:                   15%