July 13, 2020
Poulos Advisors - Quarterly Observations
The events of the last 6 months have most of us scratching our heads in a bemused way and reflecting on the uniqueness of this time in history. After a significant drop in the prices of all types of investments we have now witnessed one of the strongest and fastest rebounds in history. Actions taken by the Fed along with the large fiscal stimulus bills passed several months ago helped turn the markets from a bear to a bull in a just a few months.
The factors playing into our bemusement are legion. The pandemic continues to affect most countries around the globe. On top of the human tragedies created by the infection, we are confronted with the economic situation caused by the necessary actions taken to contain it. The social distancing prescriptions the doctors ordered have caused significant economic hardship on a host of levels. Many companies edged closer to the brink of bankruptcy even as we watched others fall right over. Most levels of government are in difficult situations with the resulting falloff in revenues. Families around the world are wondering just how they will manage to pull through with their jobs either temporarily or permanently changed or eliminated.
As if that weren’t enough we find ourselves in the midst of a societal protest set off by the tragic death of George Floyd, a continuing trade war with China, the much debated tariff regimen producing a tax on consumers of foreign goods and the growing contentiousness and partisan discussions around the November presidential election.
Of course, the future, and especially as it affects politics and the economy are always less than certain. Most of the time folks feel they have a sense of where things are heading and most of the time, they are close to making an accurate assessment. With all the uncertainties swirling around us at this time however, most will admit they do not really have strong convictions as to the shorter- term outlook.
Notice the subtle change once we add the dimension of time to the mix. The events of this unique period have us all admitting to confusion about shorter-term outcomes. When will the vaccine appear? How big will the economic contraction be by year end? Who will be our President in 2021?
But lengthen out our time horizon a bit and the ramifications of all this crazy uncertainty become just a bit easier to bear. Look out three, four or even five years into the future and we can begin to have a better sense of what the future will likely hold. The notion of a vaccine or treatment for the virus seems all but certain, a substantial economic rebound seems very likely and the idea that nations will negotiate to facilitate their economic success is easier to believe.
The implications for our investment portfolios and the financial planning goals that rely on them are certainly more palatable when we think over the longer-term. The daily headlines pack a bit less punch and it is easier to take a deep breath and see our future with a bit more clarity.
We all know by now that investments in stocks are longer term affairs. Stocks swoon and recover fairly frequently and as such do not provide a good funding source for day to day necessities. But over time equity investments are an important part of our portfolio, helping with their higher growth rates to hedge against inflation and to participate in the benefits of a growing economy. Economies do grow over time, helped by the previously mentioned inflation as well as population growth, higher levels of efficiency and better technologies.
Taking a longer-term view helps us be better investors in a whole host of ways. Rather than sell in fear at an inopportune time we look ahead and hold those securities for superior growth over time. That single steadfast action catapults us to the head of the pack in terms of longer-term performance. Drilling down a bit further we are also not beset by the problems of valuation in quite the same way that we hear our friends or co-workers discuss. “Is the market too high” becomes a subject only considered at the extreme and, even then, the prospect of valuations five years hence brings a very different perspective.
Financial planning helps us take that so important longer-term view as we contemplate future cash flows and helps to quantify what our portfolio needs to deliver and when.
Current valuations and expectations for future growth or lack thereof can certainly aid us in the decisions we make in our asset management process. We use relative valuations to help us make good decisions about the asset classes in your portfolio on a regular basis. Rather than pass judgement on the market as a whole this sort of analysis attempts to identify areas of the market that are priced too low or that look too dear and allows us to take advantage by over and under- weighting the various sectors and size classes of stock within a portfolio mix.
Right now, that sort of analysis has brought us to an almost “neutral” positioning across most of the asset classes in your portfolio for the first time in many years. Across the asset classes it is only in domestic stocks where we still find a heavier emphasis on the stocks of larger companies at the expense of shares of smaller and medium sized companies. That has been a good place to be through this latest turmoil as shares of small companies especially were affected to a greater degree by the recent turmoil. We are currently assessing that particular positioning as well though, as thatharder hit in smaller company shares have brought their relative valuations in line with historical norms when considered against their larger US stock cousins.
As to market valuations as a whole (yes, we knew you wanted to know about that notwithstanding our long-term exhortations) there is an awful lot of disagreement among investors. Some would argue that the recovery will be slower than anticipated and that the rise in share prices over the last while is overdone. Others though point to the components of stock valuation math and note that the very low interest rate environment coupled with a longer-term outlook (as earnings growth returns toward normal a few years hence) justifies the current level of the market. Both make valid points and both outlooks will be worn on the sleeves of bull and bear respectively as the year progresses. Only time will tell if the short-term positioning of the market is a bit rich or just about right but, measured over a slightly longer period, neither will likely affect your financial well-being 5 years from now.
Your statements certainly look better now than they did at the end of the last quarter. As such it is an excellent time to think about how you will feel should this market take another leg down. Volatility, even the extreme sort we witnessed this year so far, is part and parcel of investing. Longer-term, assuming your portfolio design is consistent with your goals, this volatility won’t have an adverse effect on your long term planning whereas the alternative, not owning these sorts of volatile assets, will in many cases have a much more substantial negative consequence as inflation reduces the value of your holdings.
This brings us back to an undeniable fact – the market cannot be timed. 2020 has done an excellent job of illustrating that, and while the ups and downs of the market can weigh on our emotions, they are a necessary part of making gains in the capital markets over time.
We appreciate your trust and confidence in us.
The Investment Team
Poulos Advisors, Inc.