Inflection
In
the wake of Covid-19 the investment landscape is shifting quickly and
dramatically. There appears to be a new
paradigm for valuation and macroeconomics, one which migrates away from strict
integers and encompasses a “moral”, or socially responsible, consciousness in
addition. We believe that shift to be a
boon to investment portfolios, particularly as global uncertainties
recede. There is a new focus upon
demographic and technological changes that emerged from the pandemic which
encourages a greater emphasis upon sustainable environmental protections,
healthcare, and social governance. More
so than in previous generations today's thematic investments offer the
combination of anticipated portfolio wealth-building as well as strategies for “doing
good” for the rest of the world.
More
specifically, however, is the question of whether or not those factors can be
sustained in our collective psyches as new standardized benchmarks for growth
and prosperity, or whether or not this post pandemic feel-good moment is just a
fleeting illusion. As investors wonder “what's
next” the new reality becomes a challenge of evaluating opportunity in a wholly
redefined landscape. The pandemic
affected not only our health and financial reckonings but also our attitudes about those things, as well. Should it not be true that what is good for
the possibility of our investment accounts should also be good for the common
sense of our social fabric and our responsibilities towards others? We believe that both can be affirmed
concurrently.
There
are several other factors which support our guidance that the markets are
poised for a new era of wealth creation.
Demographics become destiny. A
demand for new technologies will have a dramatic multiplier effect upon
healthcare, transportation and infrastructure, education, and energy. Global central banks are still maintaining a
hands-off approach to inflation, keeping interest rates (borrowing costs)
low. The end of the pandemic also
incentivized corporations holding large cash reserves to start anew to endow innovative
initiatives, begin to rehire displaced workers, and to think about the longer
term once again. And it is the long term
that has us excited about profit expansion and capital gains. There might be a period of modest contraction
off of today's high valuations in the next two quarters but the runway for
generational transformation and capital expansion is almost certain to be hectic.
Markets
One
year ago investors found themselves at the depth of pessimism about the
condition of their world and their spirit.
Today, otherwise. So, what happened?
For
one, the markets last spring and summer were driven by an inordinate amount of
short term trading and speculation...on the way down and throughout the “bottom”. Many thought that the best strategy was to
bail out completely, hoping to avoid any portfolio depreciation, at the risk of
abandoning all asset allocation protections taken earlier (that were designed precisely
to mitigate just such a crisis). After
the hysteria wore off many of those same individuals were the first ones calling
their portfolio advisor to get back in
to capitalize upon valuation decimation
that ensued. For all the confusion and
turmoil, the year-after, net-net should have been to restrain the hysteria and
to stay the course. We are now at, or
above, those previous, pre-Covid, valuations and rewarded for our persistence,
patience, and methodology. The real
issue is that micromanaging stock returns
usually backfires, does not begin with a macroeconomic overview, nor always end
with the desired outcome. For sure,
there is now a greater appreciation for conventional portfolio method that
reflects patience and discipline.
No
doubt, ratios, prices, and earnings are quite high at this moment. But integers must be viewed through the
perspective of sector rotation, geography, science, and ethics. In other words, our preference is to monitor
patterns of revenue and asset growth that shape the markets and the economy for
the long term. To be clear, there is no
such thing as “perfection”. But
quantitative science deals in the realm of probabilities. And right now those probabilities are at an
encouraging inflection.
As
noted above, the next few months might be riskier. There is widespread concern that pricing
pressure (inflation) is a bogey to be feared.
We believe otherwise...that price pressure and higher interest rates are
a harbinger of a renaissance of an economic expansion that was occurring before the pandemic arrived. The last 3 or 4 weeks of this past quarter
were a manifestation of the market's inability to see the forest for the
trees. Investors vote with their cash,
and currently they are losing faith that upside momentum can be sustained. Any volatility and doubt, we believe, should
be short lived and not a reflection of significant deep-seated headwinds.
The
fact that the economic recovery (from 2008) was interrupted by a health crisis
rather than by underlying fundamental elements is cause for optimism that the
longest, largest economic expansion in recent times should continue.
Strategy
There
is a troubling undercurrent that people are not only losing faith in market
sustainability but in their other entrenched institutions. Lawlessness is on the upswing, unemployment
is still a lingering a problem, schools are half-empty and doing a poor job of
educating their students, government is stalemated, the racial bias gap is
widening, and community agencies are behind the eight ball when it comes to
feeding the hungry and providing shelter to the homeless. Our collective social disconnect, and the fissure
between the haves and the have-nots, is wider than ever before. The fact is that one's choices are today
dictated by their zip code, age, religion, geography, ethnicity, and capital
reserves. One may not like it, but it is part of the truth that must be
confronted. We may never go back to the old normal,
because the devastation wrought by Covid-19 has created a period of
introspection, revolution, and perception that has changed our realities
forever.
There
is space for capitalism and market optimism, but
also for sturdy fundamentals and vigorous profits that give back to the less
fortunate.
Conclusion
After
a year of market turbulence, emotional suffering, and death we must approach
our economic and social sciences with a new perspective, one which applies
proven principles of supply and demand, profit and earnings...and, yes, moral philosophy. There is no statistical formula for personal
happiness, but nor should we always try to equate market valuation to that
integer. In fact, our economic and
spiritual rebound can be even more robust and substantive if we apply new vocabulary
and new thinking to the endeavor.
Whereas asset allocation and sector weighting are the hallmarks of this
author's quantitative methodology, determining which industries will flourish
in the next 20 years is just as much about ethical ideology as it is about
stochastic integers. From chaos,
order. Particularly in areas that affect
public welfare such as environmental
protection, renewable energy, agriculture, potable water, education,
technology, housing, infrastructure, war and terrorism (population migration
and displacement), and social responsibility
Trying
to understand the connection between emotions, objectives and facts is not just
an ideal...it is our new imperative. How
our cognitive biases influence our investment choices creates the financial
maelstrom. Learning what is driving the
rapid changes that we are all experiencing is not a pedestrian exercise...... it is a complex, multilateral conundrum that
takes time to understand. Unfortunately,
we live in a world of immediate gratification.
The digital age makes us aware of and responsive to a multitude of
stimuli minute by minute...all-time highs, all-time lows. Instead, it is time to understand that wealth
is a partnership, created over time, between ourselves, our hard work, our
money, and the benefits of which that accrue to others. Real wealth (resources) differentiates
between method and impulse, expectations versus behaviors. Therein lies the riddle of modeling the
future.
Suggested
balanced account asset allocation, Q3, 2021
Equity: 40%
Fixed
Income: 40%
Cash: 20%
