As always, I want to thank you all for being such great clients and friends. Let me also thank you all for trusting me with your hard-earned money towards pursuing your financial security. Many of you have trusted me with new investments this year and many have helped me and their friends and loved ones by providing referrals, for that, a special thank you. That vote of confidence means so much to me.
This is the first newsletter in which I can say that I see an end to what an awfully long year has been battling this Pandemic. Almost 1 year ago to the date of this writing was when we as a country started to understand the potential issues that Covid 19 could bring. As we all know, our lives started to change dramatically. Now with three companies having vaccines approved in the US and a couple of more awfully close to being approved, we can feel the relief that Covid 19 may be under control and our lives can get back to “normal.” As of March 8, 2021, over 90 million Americans have received at least 1 vaccine and many believe that by sometime this summer the US will reach herd immunity (enough people have had the virus or the vaccine making further spread unlikely.)
The first few months of 2021 have been interesting for investors. I will attempt to explain why it has been such a roller coaster. While there is no definite timeline to when the country will be free of COVID-19, many people have decided that they are done with this “lockdown exhaustion.” Many have started to travel and ignore what they have been doing for the past year. Governors of a few states have lifted lock down restrictions that have been in place for some time as well.
All of this has brought upon us a big theme, inflation, or the threat thereof. The Federal Reserve (FED) and US Government continue to provide stimulus which provides even more capital to the markets. As people think about the economy reopening and the government continuing to provide stimulus, many are worried about the potential for higher inflation. The theory is that if inflation rises too much, the Fed will have to raise rates. Higher rates and subsequent higher borrowing costs are not good for certain types of stocks, such as growth stocks, that depend on borrowing money to fund expansion. Due to this, as interest rates rise, there is often a rebalancing as growth stocks multiples are often considered too extended which forces their prices down, while value stocks rise as their price multiples move lower.
Additionally, owners of bonds have been selling their bonds due to the concern that the value of these bonds will decrease with inflation and if the FED raises interest rates. This is not the first time we have seen this. The most comparable example is referred to as the “Taper Tantrum” of 2013.
The question is whether this steep and rapid increase in rates is justified. There are many reasons to doubt this such as:
Globally, interest rates are much lower than in the US so foreign demand will push yields down.
“Gig” or “Stay at home” work is here to stay for some part of the population, keeping related expenditures down.
Oil has rallied due to the reopening trade, cutbacks by OPEC and storms in Texas which should reverse; the higher price of oil with stimulate supply increases, the storms ending will allow production to come back online and the reopening is being hindered by new variants or Covid 19 as well as international vaccination deficiencies.
Higher interest rates have forced mortgage rates higher so less homes sales should reduce rising prices.
Technology has increased shopping online which limits price increases at the retail level.
In summary, the market rotated from growth to value focused investments due to rising interest rates and inflation. Over the last few weeks many stocks are way off their highs. I believe that interest rates should be higher than they were at the end of 2020, but the rise has happened too fast.
When an investor buys stocks, they are in fact investing in the future profitability of those companies. Companies as well as people have saved large amounts during the virus and likely have become more efficient which should last after the virus is over. This should result in more savings, better earnings, and increased wealth. I look at the pandemic as a forced industrial or technological revolution that favors technology in all sectors and that these forces are here to stay for all to benefit.
Please call me to review your account performance for the year and please let your friends and family know about me. Thank you very much.
Past performance is no guarantee of future results. Investing involves risk and the potential to lose principal.
The information provided, including references to market sectors and investment strategies are for general informational and educational purposes only. No comments referenced herein should be construed as a recommendation of any kind or investment advice.
Forward-looking statements are subject to numerous assumptions, risks, and uncertainties, which change over time and cannot be guaranteed. Actual results could differ materially from those anticipated. Please consult your financial advisor before making financial decisions.