4Q 2020 Quarterly Letter

October – December, 2020

As we enter 2021, the Government stimulus continues.  The Federal government is currently sending out a second round of checks, and with the Democrats recently winning the two Senate seats in Georgia, and therefore controlling the Presidency and Congress, the expectation is that more stimulus is on the way.  In addition, the Federal Reserve continues to state that they will keep short-term interest rates near 0% for an extended period of time.  This stimulus, coupled with the rollout of the COVID vaccines, should lead to better corporate earnings as we move throughout the year.  It is our view that these factors should act as a floor for stock prices in the near-term.
On the political front, close attention will be paid to how the new administration moves forward with tax policy, infrastructure spending, regulations, and healthcare reform.  The scope and scale of these programs will be very important as we try to get back to a normal way of life following the pandemic.
Although we think that the stimulus will continue to support stock prices in the near-term, there are a number of things we are concerned about longer-term.

  • Unlimited government spending and central bank stimulus cannot go on forever. Once the economy is back on its feet, the stimulus will need to be curtailed and eventually removed.  What lasting effects this historical money printing has on the value of the U.S. dollar and inflation remains to be seen.
  • The run-up in the stock market has not been “even” across all companies and sectors. A few extremely large companies account for a significant percentage of the overall market value.  It is our belief that the market needs to broaden out for this rally to be sustained.
  • Historically, large stimulus leads to bubbles in asset prices. We believe we are already seeing the signs in some high growth technology stocks.  Valuations will matter in the long run.  We need to continue to be disciplined in our investments and not feel tempted into chasing over-valued stocks.

2020 was a volatile but profitable year in the stock market.  However, we will not become complacent.  As we evaluate the different market forces, there are a few things we are looking at closely in accounts.  First, we will be reviewing the balance between stocks and bonds.  That balance is an individual decision based on a client’s risk tolerance.  With the expectation of short-term interest rates remaining near 0%, the ability to earn a reliable and attractive-yielding income stream from bonds is extremely limited.  Unfortunately, we do not see this changing in the foreseeable future.
Second, we are looking at the balance within stock portfolios.  We want to make sure that we are well diversified in different companies across different industries.  While we will continue to hold positions in many of the companies that have benefited from the “stay at home” trend, we believe it is prudent to harvest some profits in those names and reallocate the proceeds to some names that should benefit as the economy hopefully returns to normal later this year.
We want to wish you and your family a safe and healthy 2021.  Please do not hesitate to call if you have any questions concerning your account.

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