Between the election, pandemic, vaccine rollout and a rollicking mood on Wall Street, it took us a while at Longwave to pull our thoughts together at the beginning of 2021. It will clearly be a year of crosscurrents and change – we’re excited to see what it brings.
One of the best things to come from 2020 is there are so many more dogs in my neighborhood. In my limited experience walking dogs, I’ve found that these adorable furballs like to stop often (when you have to pull them) before suddenly charging enthusiastically run ahead (and they pull you). Luckily, there is a leash that tethers the dog to my pace and that seems to keep the process going. You might have guessed by now that our family does not have a dog despite the pleas of my children.
Similar to my dog-on-a-leash analogy, the stock market and the economy are two other things that usually stay tethered to one another. The stock market represents the economic activity of the economy so the two must move somewhat in tandem. However, during times of turbulence or distortion, one or another may run ahead; but eventually, the leash will pull them back together.
Today, the dog appears to be off the leash. Since the beginning of 2019, the stock market has gone up by 50%. Meanwhile the economy has shrunk by around 2%. From a historical standpoint the market is “expensive” compared to corporate earnings. We know the environment is frothy when tulip mania-like stories begin popping up on an almost daily basis. Stocks like Hertz, GameStop and AMC Theaters have soared 400%, 500% and 600% (before plummeting again) on nothing more than internet chatter and day trading is back in vogue among a generation that was in grade school in 1999.
Despite this apparent disconnect, we are optimistic about 2021. Unemployment has fallen below 7%. Multiple vaccine options are on their way, borrowing costs are low, 401k balances are flush, and the US government is pumping out stimulus a-plenty. We believe these things will continue to provide support for an economic recovery.
The stock market could be another matter. With certain sectors of the market as expensive as they were before the dotcom bubble burst in April 2000, we could easily see a pull back. Essentially, this would be the reverse of 2020 when the market did well and the economy performed poorly.
Fast forward to today, we have a stock market powered by a handful of successful, highly profitable technology companies. The question is, would you invest in these companies at any price? Today, it seems a lot of people would.
As you can imagine, we are going into 2021 with continued caution. Yet we feel better about our portfolio positioning than we have for a while. Our portfolios tend to avoid expensive stocks, while leaning more heavily on smaller companies and more profitable companies. Furthermore, we have stuck with a higher than typical allocation to overseas companies because of how much cheaper they have become compared to the US stock market.
Since October, there’s been a rotation out of expensive asset classes into ones that we favor and we think this trend could continue for a while.
Does this mean it’s time to run for the hills? We think not. We think our selection of previously underperforming asset classes could insulate us somewhat from a market correction. Second, and stop me if you’ve heard this one before: it’s impossible to time the market. The dog has a mind of its own. While we think there is a disconnect between the stock market and the economy, this phenomenon could persist for a long time.
If you haven’t heard from us already, you can expect to in the early months of 2021. But if you’d like to speak earlier, don’t hesitate to reach out and we’d be happy to discuss your circumstances in more detail.
We’ve found this time of year to be particularly useful in helping people take stock of their financial life. If there are people in your personal or professional life who would benefit from Longwave’s perspective or are going through a life transition, the best way to make an introduction is simply sending us, along with your family member, friend or colleague, an email. We’ll do the rest.
The vaccine is coming and we hope you all stay safe and patient until it’s your turn for a jab.