Raise your hand if you predicted 2020 would see a global pandemic, massive unemployment caused by the first ever government mandated economic shut down in history, a highly contested election, and a stock market recovery from the lows that was amongst the strongest in U.S. history, all in the same year? Ok, put your hand down, there is always one in a crowd! While the calendar has turned all the pages of 2020, there are many differing opinions as to the current health of the U.S. economy and financial markets, have they come too far too soon, what effects will government stimulus and economic dislocations have on the financial markets in 2021 and beyond?
Widespread uncertainty in 2020 failed to dampen the outlook and recovery of equities in Q2 and Q3 2020, record low interest rates were certainly the fuel and spark the markets needed, however the markets took a pause in early Q4 as election chaos gave investors pause, until positive vaccine news once again provided the spark in November 2020. Stocks across the board have risen to new heights, awakening even value stocks from their multiyear slumber. However, following such an impressive rise some on Wall Street believe the rally has come too far too soon, prompting calls of a “bubble” in both stocks and bonds.
While it is our opinion that we are not currently experiencing a bubble in equities, we will grant that the most striking characteristic of economic bubbles, the very thing that fuels their existence is our blindness to them! Perhaps we should first define what a bubble is, one definition of a bubble is that an assets price rises rapidly to the point of being disconnected from any reasonable measure of its inherent value. This is typically caused by emotional inertia driving future expectations higher causing an implausible gap between price and value, some might say Bitcoin! Just an observation largely based perhaps on an inability to make a case for its value given many still can’t even determine if it’s a currency or a commodity! If it’s a currency there is not, and cannot ever be enough in supply to serve this role, if it’s to be viewed as a commodity similarly to gold or silver, I’ve yet to find anything that requires Bitcoin in its manufacture. It may very well continue its explosive price ascent, but attempts to determine “what it’s worth” have been difficult, if not futile.
One asset class where we believe weakness will continue is bonds; with rates at record lows and significantly elevated federal spending to support the economy as well as fund party pledges, we are aware the Fed’s desire is to keep short term rates at low levels, this does not preclude the free markets from pulling the intermediate and long end of the yield curve higher. This realization may seem unsettling to some investors, however, if the economy does start to show better growth in the second half of 2021 as we expect it will, we will likely see rates rise and bond prices fall. Alpha Fiduciary has focused on bond allocations largely supported by real assets or special circumstances which we believe are preferable to own, relative to traditional fixed rate bonds, in rising rate environments.
Finally, earning season will likely provide support for stocks as we begin to see the world return to a more normal operating environment, it would not surprise us to see at least a temporary surge in economic growth before settling in to a more gradual and sustainable GDP growth in the 2.5% range as pent-up demand is satisfied in 2021.
While we don’t think most longer-term investors should underweight stocks in this environment, we favor a core/tactical approach to equities as we believe this presents an attractive upside capture while posed to potentially reduce downside exposure should factors signal to reduce equity exposure in the event it’s warranted.
There are many different approaches to the tactical management of equities, designed and employed with the goal to gain exposure to asset classes when they are rising, and to reduce exposure to those asset classes to limit or reduce downside capture.
If you would like to discover if Alpha Fiduciary’s wealth management approach can benefit you, please visit Alphafiduciary.com, or call us at 480-505-4033.
Alpha Fiduciary is a SEC registered investment advisory firm. This blog is provided for informational purposes only and should not be construed as personalized investment advice and should not be considered as a solicitation to buy or sell any security or investment advisory service. Please refer to the Investment Adviser Public Disclosure website (www.adviserinfo.sec.gov) to review our Form ADV Brochure for more information.