Whoa...I'm not really sure what that was...I'm not sure anyone knows what that was. However, I think we're all glad it's over and we can focus on 2021, but I think it's unlikely this year will start any different than last year ended. I will spare us all from any over used cliches, but I am glad we are moving on.
I think there is a lot to look forward to in 2021. Vaccines are being rolled out, life will eventually (I will not take a stab at a date) return to normal, and we will be able to travel and resume doing the things we love doing. I also believe some stability in financial markets will alleviate our anxiety. Historically low interest rates and accommodative central governments around the world will keep economics improving and some of the worries like the US election and unknown vaccine approvals are behind us.
That said, we do have a near term event that may cause some short term volatility. The Senate run off in Georgia will occur on Tuesday January 5th. There are two seats that are up for a re-vote as the November 3rd results were too close to call. We currently have what's called "political gridlock" in the United States...where the Democrats control the House and Republicans control the Senate - this is a good thing from an investor's point of view. Effectively it means the Democrats cannot do much to change the course of current policies as Republicans will vote down bills they don't agree with. The concern is that the run off flips the current Republican seats and the Democrats control both the House and the Senate (yes it's that close) and then the Democrats will be able to push through their agenda as they have the majority in both. I actually made the mistake of turning on CNN this morning where they called it "A potential apocalyptic turn of events". Wow...I'm not sure how this is possible apocalyptic, but it did reinforce my view to continue watching Seahawks football games over political TV. Why am I bantering on...effectively I am here to tell you much like the election, this too will be a non-event. While there might be some short term volatility, don't get caught up in it because low interest rates, Fed policy and return to normalcy should move markets higher in 2021.
Topics of Discussion
- Fundstrat - Where Might We Be Headed in 2021
- Federal Debt is Not a Problem...Yet
- An Opportunity in Energy? A Look at Valuations
- Exposure to Asia/Pacific
- Fun Fact - Need Ideas for a Mark This Year?
Fundstrat - Where Might We Be Headed in 2021
Some of you have heard me speak about Fundstrat in the past. They are a US analytical firm that provides technical & political analysis. They have a weekly call I listen to and I have utilized them as a resource for years. They have been very accurate in medium term market movements - that is, while they can't (an don't)predict day to day moves they have been accurate in quarterly, semi-annual and annual movement. Below is a chart taken from one of their presentations recently, and their belief is that we are in the early stages if the 4 year cycle. That is, since the low of 2009, the market has moved high for 2-3 years and then sideways for 1-2 years. Of course, when volatility is occurring it doesn't feel this simplistic, but in a secular bull market like we are currently experiencing, they believe our next move is higher for 2-3 years.
Another third party resources I use is the firm Federated Hermes. Again, they are a US firm, but they are a large money manager and also have weekly commentary I follow. They too are bullish in 2021 as they have a 4,500 target on the S&P 500..that's ~20% upside...while I would temper our expectations, they too have been very accurate in their medium term forecasts. Their 5 page 2021 outlook can be found here: https://www.federatedinvestors.com/home.do.
As I mentioned above, I am optimistic for 2021. There will be periods of volatility and fear this year (like every other), but they should be short term in nature and provide opportunities to buy good companies.
Federal Debt is Not a Problem...Yet
I get a lot of questions and have a lot of conversations around the amount of Federal debt created around the world this year. The tougher answer is in the long term - yes, there is mountains of new debt, but as per the chart below, this is till not an issues from a cost of debt perspective. That is because interest rates are so low, we don't believe debt will be a major headwind in the short-medium term. The one thing that would change this is if inflation roars in and interest rates move substantially higher. Some people argue inflation is coming and therefore interest rates are going to move higher, but I think that's premature. Inflation can be a result of too much money in the system, but it also requires very low unemployment - that is, workers are scarce and wages have to increase to entice workers to companies. With those increased wages, people go out and buy more things as they have more discretionary income - there may be other consequences of this, I think inflation and therefore interest rates likely stay low for some time.
An Opportunity in Energy? A Look At Valuations
Being from Alberta, Energy is always a hot topic...or cold topic. For those of close to the battle, it has been 6.5 years since the energy highs of August 2014. A couple of times since then, energy (and associated companies) have looked compelling only to grind lower due to unforeseen circumstances. Energy and other commodity companies are price takers and therefore cannot control their revenue...this is what makes them a difficult investment in times like this. There may be some shining light however (full disclosure, I have said this before) as valuations are historically ow as per the Fundstrat graphs below. While renewables are coming, demand for oil will keep us exploring and developing it for our lifetimes. There is currently both oil and gas exposure in the portfolio and we may look to add to this as more information becomes available over time. Oh, and one last thought - just because an industry is cheap doesn't mean it can't be cheap for a long time.
Exposure to Asia/Pacific
I recently had a call with a fund manager in Canada who manages Chinese equities. Some of the numbers are staggering and I have completed more research in the area. This is an area we have some small exposure to, but will likely become a bigger allocation this year. The more staggering number is around the growth of the emerging middle class in China - 90 million in 2006 to 750 million today...truly staggering growth and opportunity.
Fun Fact - Need Ideas for a Mask This Year?
I try to keep these emails short with lots of pictures...because that's how I prefer to read emails. To end with a little light-heartedness, check out some of these homemade masks. The fist is my favorite...which I promise I haven't tried yet.
As always, I truly do appreciate your trust and business. 2020 was a very unique year and I believe we got through it in a great position.
Take care and chat soon,
John