Yes, the title was meant to be a bit dramatic and entice you to read on.
What a roller coaster of a year 2020 has been, to say the least. I will try and limit my comments to financial issues in this letter and stay clear of the many social issues we are all dealing with concurrently.
In January, we had just come off a strong year economically with solid growth, record low unemployment and an accommodative Fed policy. Everything indicated a green light for the economy. In February, our “Black Swan” arrived. The COVID pandemic and the subsequent global political response changed everything. We watched as businesses were shut down and shelter in place measures were implemented. The panicked selling of investment assets drove the US stock market down about 35% and the International stock markets down 40% by March 23rd. Bond markets were being stressed with liquidity issues towards the middle of March, adding more fear of a financial system meltdown.
Fiscal policy and Fed stimulus were the response, in very swift and generous measures. The Feds lowered interest rates to near zero and began to provide the liquidity the markets needed through bond purchases. Congress enacted the CARES Act providing checks, extended and enhanced unemployment, PPP loans and relaxed retirement plan access to the tune of hundreds of billions of dollars to support the economy.
This aggressive stimulus has enabled us to avert a financial meltdown and helped support asset prices. We have seen a remarkable recovery of the stock market as measured by the major indexes. The stock market recovery is narrow, as only a handful of stocks that comprise a large weight in the major indexes are participating. There is also a large renewed interest of retail investors to speculate in the markets. With new trading apps, tools and social media providing a platform for the “wisdom of the day”, I see a frothy level of speculative trading activity that has helped drive pricing to very rich levels for those who don’t want to “miss out”.
“The rule, supported by the experience of centuries: the speculative
episode always ends not with a whimper but with a bang.”
John Kenneth Galbraith
Even though we have seen a tremendous recovery in asset prices, I am not convinced that we have a broad-based economic recovery at this time. I think it would be hard to argue that we are not currently in a recession. We have seen an unprecedented shut down of businesses and stresses to many industries: Travel, Entertainment, Gig Workers, Energy……… the list goes on. We now have record unemployment vs full employment as recently as six months ago.
As we look at many of the traditional indicators of value, our feeling is that portions of the market are priced at very high historical levels. That, paired with the concentrated participation of stocks in the index and high levels of retail speculative activity, leads us to stress the importance of reviewing the risk level of your personal portfolio as we move forward.
I want to reiterate that we do not believe in market timing or the ability of anyone to successfully move in and out of the market over time. I am excited to be using an Active Investment Management approach such as ours currently, where stock selection should become more valuable. Tactically, we can look to lower our concentration in assets that appear overvalued and weigh more heavily assets that appear undervalued on a relative basis. This environment logically should favor that approach, as opposed to passive indexing.
We will be rebalancing our portfolios in the coming weeks to take advantage of what we feel are inflated equity prices. Please note, that we will not be lowering stock exposure below our targeted risk for your portfolio. If you feel that you would like to review your portfolio risk profile and potentially reduce your stock market exposure, please reach out to our offices to speak with a financial advisor.
Benjamin W. Wong, CFP®, AIF®, MBA
President, Senior Financial Adviser
Tel: 925 227 8858 |Fax: 925 227 8859