| 4th Qtr.
| 12 Mo.
|10-yr Treas. yield||0.917%||0.677%||+0.24%||1.92%||-1.003%||-1.003%|
|Fed funds rate||0 – 0.25%||0 – 0.25%||n/a||1.50-1.75%||-1.50%||-1.50%|
(stock indices are before dividends; yield and rate changes are absolute changes)
An historic year ended with very positive results for investors. All three major US stock measures hit new record highs in December and the NASDAQ finished a two-year run with a total gain of over 94%, reflecting the strength of large tech companies. (There is nothing magical or significant that the Dow crossed 30,000, other than it continues to go up.) Tesla joined the S&P 500 and entered the index as the sixth-largest holding, but any anticipated market disruption from index funds adding Tesla did not materialize. Small cap stocks were strong after lagging for years, gold was off its summer high but finished the year on the upswing and bitcoin hit new record highs, quadrupling in price for the year. The benchmark 10-year Treasury flirted with 1% but fell just short and the US dollar fell to its lowest level in three years against a basket of major currencies as investors bet on a global recovery, which boosted international investments.
On the fixed income front, US corporate and government debt issuance hit new records and global debt is at 365% of global GDP. Low quality debt issuance is growing much faster than investment grade, which is an ominous sign. Government bonds have had a negative real return (yield less inflation) for years, but 10-year investment grade corporate bonds hit a negative real return for the first time ever.
The Fed signaled it won’t start to taper its asset purchases ($120 billion/month) until “substantial further progress” is made in the economy. At the same time, the forecasts for 2021 were improved, with unemployment at 5.0% (was 5.5%) and GDP growth at 4.2% (was 4.0%). As expected, third quarter GDP growth rebounded strongly, at an annualized rate of 33.4%, still not enough to fully recover from the second quarter. Investor confidence is extremely strong, with margin borrowing at historic highs and aggressive investing strategies being very popular with new investors.
Consumer confidence softened in December at a 4-month low due to steady present conditions but lowered expectations. Consumer spending and retail sales fell in November and incomes dropped in three of the final four months, with the Fed’s inflation measure still very soft. Historically low mortgage interest rates and low supply kept the housing market relatively strong, although there are preliminary signs it may be losing steam. Unemployment claims crept up through November and December, with November adding the fewest number of jobs in seven months and the unemployment rate now at 6.7%. The number of long-term unemployed has increased by 2.5 million since February.
Congress passed legislation on December 20 to both keep the government running and to provide a second $900 billion round of pandemic relief, including stimulus payments of $600 per person, but President Trump balked on signing it although he had not been involved at all in its compromise. He finally signed the bills a week later with no explanation, satisfying the markets’ expectation of some relief. The UK and the EU finally reached a Brexit deal on Christmas Eve, after 4 ½ years of turmoil, avoiding tariffs and quotas that would have gone into effect on January 1.
With the second COVID relief package passed, with more possibly to come, the market’s forward look to the end of COVID may be validated. Still, there are plenty of questions as to what exactly the “new normal” might look like, and how long transitions will take. Of course, “new normal” is not only an overused phrase, but also an oxymoron, so let’s just call the economy when the pandemic winds down “post” – post-pandemic, post-isolation, maybe post-hysteria; it’s probably too much to ask for “post-mistrust”.
The big questions are well known – when and how will travel rebound, will local hospitality businesses be able to survive, what exactly will “work” look like and how many workers will return to offices? The new work dynamic has driven plenty of relocation and a reversal of the urban living trend, but will that continue or revert? Will all the companies that have benefitted from pandemic-related adjustments, and seen their stock prices soar, suddenly deflate?
The uplifting developments with vaccines have been offset by disappointing results in the initial rollout. No one argues with having health care workers, first responders and vulnerable nursing home residents at the front of the line, but the number of vaccines delivered to state and local agencies fell far short of initial projections and ongoing logistics problems further complicated the rollout. It is still not entirely clear if the vaccine will diminish the transmission of the virus as well as reduce sickness when someone is infected.
President-elect Biden has pledged to administer 100 million vaccines in his first 100 days, which is an admirable goal, but it will likely turn out to be an aspirational goal rather than a target that can be hit. (Just for reference, one online tool that uses a personal profile of age and health status and your county of residence shows me behind 833,000 people in line in Pima County; there are only a million people in Pima County, so I’m not holding my breath.)
Hopefully the initial enthusiasm will translate to patience and cooperation rather than devolve into nonconstructive bickering and complaining.
Finally, after the driest year in Tucson since records began in 1885, will it ever rain again?
This tumultuous year has caused reactions across the board, from taking no action whatsoever to changing strategy with every news development. Two broad themes, one directly portfolio-related and the other indirectly, deserve comment.
The first theme, which should not be surprising, is selling stocks in a fit of panic. Despite our strong advice, which was successful in backing several clients off the ledge in March, there were still a few who insisted on making a significant reduction in their stock exposure. (No one exited stocks completely, and the election turmoil did not create the same panic as the sharp COVID market decline.) We were respectful of everyone’s concerns, but at the same time we made clear that if the client chose to sell against our advice, we would not be offering any advice on when to re-enter the stock market and they would be on their own for that decision.
We did keep track of what the decision “cost” the clients compared to staying invested, but that was just for our own reference and we did not share that or say, “we told you so”. With the strong recovery, that cost has been pretty large. But that is hindsight, and the sharp recovery is not the point; the last thing we want clients to think is that every time the market takes a dive, it will quickly recover. The point to be made is that we can’t know how the market will react after a dive, and for that very reason each client’s allocation to stocks is intended to get them to their long-term goals, absorbing the ups and downs along the way.
The second theme is a broader one that incorporates investments. If ever there were a stark reminder to always have your affairs in order, COVID was it. If they have any plans at all, most people will say they have a will and assume that will do the trick. But it can be illuminating to do a simple exercise – if you got hit by a bus tomorrow, what would happen?
Some basic considerations include:
• If there are minor children, has a responsible custodian been named? Has consideration been given to whether the control of any money should be assigned separately from the care of the children?
• Do the people who have been named to have responsibilities under the plan even know they have been named?
• Are those people both willing and able to perform their role? Are there contingent parties in case the first party declines?
• For investments, are there beneficiaries, both primary and contingent, wherever possible?
• Is your investment adviser aware of your estate plans, and do those plans create any special circumstances?
• Do you have an “inventory” of contacts, so your loved ones even know who to call to get started?
There are of course plenty of other considerations, but the lack of a comprehensive and current estate plan is yet another example of focusing too intently on a portfolio and neglecting other critical areas. In the unlikely event you are hit by a bus, or become critically ill or incapacitated, scrambling to deal with these issues is the last thing you or your loved ones will want to do.
This is not about the financial hardships caused by the pandemic and its upheavals, although they have been substantial. Rather, it is a reference to Alex Trebek, who passed away this fall after 36 years of hosting “Jeopardy”. Alex was always respectful to contestants and was also a good sport with the many parodies and impersonations of him and the show. In tribute to Alex Trebek, let’s have a little Jeopardy quiz.
• Nasty Surprises for $1000 – These year-end taxable events have nothing to do with a long-term investor’s transactions.
What are capital gains distributions? (Mutual funds must distribute to shareholders the gains the funds have realized from selling holdings during the year, regardless of how well the market or the fund performed.)
• Looking for Love for $200 – This long-term strategy with lower volatility and higher income has been trounced by growth stocks for 10 years.
What is value investing? (Large growth companies have been the market leaders, although Warren Buffett and Benjamin Graham are advocates of value investing, which has traditionally had lower volatility and comparable total returns.)
• California, Here I Go for $800 – AUDIO DAILY DOUBLE (might as well go for broke here, bet big) – This outspoken CEO said “If a team has been winning for too long, they do tend to get a little complacent, a little entitled and then they don’t win the championship anymore. California has been winning for too long,”
Who is Elon Musk? (Tesla is building a new plant in Austin, Texas and Musk is personally moving there, joining several companies who have relocated from California to Austin and other cities.)
• The Five Senses for $600 – These investment vehicles, also known as blind pools, raise money to buy a company to be named later.
What is a SPAC (or special purpose acquisition company)? (SPAC’s raised a lot of money in 2020; they are lucrative for the sponsors and attractive to the companies being acquired, but investor returns have been mixed.)
• Every Last Drop for $400 – This component of investing has become ever more elusive in a world of extremely low interest rates.
What is safe income? (Investors who are used to reliable income have been taking on greater risks, which often have unintended and negative consequences.)
• FINAL JEOPARDY – the category is Fables (again, in an area of speculation and big gains, why not bet big) – This fable illustrates the wisdom of patient, long-term investing compared to short-term, high-risk gambling.
What is the Tortoise and the Hare? (Don’t be fooled by this year’s market and some high-profile incredible gains, if the goal is a long-term one the best way to get there is to take what the overall market gives you and stay the course through ups and downs.)