Last week, we had an Investment Committee meeting at our firm that generated some interesting discussions. One topic was the belief that a person must be insane to buy stock right now; that because of the presidential election, the pandemic, vaccine questions, a Supreme Court nomination, rampant unemployment and the recession, no one should be investing.
I respectfully disagree. In fact, our team believes this is a remarkable opportunity to do so.
Yes, I know, the market seems like it’s going up while everything else is down; however, some segments are really attractive. When you focus on data (not the “this time is different” story), you’ll see a historical opportunity to invest in them.
The past three years have been one of the greatest technology stock runs since the 2000 tech bubble, creating a great chance to focus on out-of-favor small cap, value and international stocks. Over the next five years, we predict a strong turnaround in these areas.
Not buying it? For a good comparison, look no further than Major League Baseball. This year’s World Series contender, the Tampa Bay Rays, seemed to come out of nowhere. Its owner, a former partner at Goldman Sachs, has been running the team like a hedge fund. At $28M per year, the Rays had the third-lowest opening day payroll. They secured cheap, but reliable, talent using data-driven analysis. In addition, they avoided expensive athletes – unlike the New York Yankees, who spent about $109M, but will be watching the 2020 World Series from their living rooms.
In the world of investing, today’s stock “stars” are the popular tech companies. However, we prefer the “cheap talent” (value and small-cap stocks), where the valuation spread between the “stars” is one of the widest in history.
Here are some other topics we discussed during the meeting:
The Stock Market: When looking at expected earnings per share, stock analysts at the top banks are pricing in a full recovery in 2021, and even expect to see a growth in profits. This is all premised on a baseline case for the vaccine, whereby investors expect a vaccine rollout to elderly and medical/front-line professionals by the end of 2020 or beginning of 2021, then mass distribution by the summer of 2021. Anything different from this will increase volatility.
The Presidential Election: The media and the market both have laser-beam focus on the election this quarter. At the end of the day, hundreds of variables will influence market returns; the president and the political party are a small piece of the puzzle. As the chart below shows, there is no correlation between the president’s party and the stock market. The market has done well under Democrats and Republicans. Anything you hear to the contrary is noise.
The Economy: The U.S. economy is recovering strongly from a steep first-quarter drop and should be back to normal by the end of next year. The Fed will keep interest rates low for the next two years, which will eliminate any benefit to holding cash for the time being. In addition, the expectation is for inflation to increase in 2021 and 2022. That could push bond yields higher, so retired investors should strongly consider adding more stock to their portfolios.
Was this update useful? We hope so. As always, we’re happy to discuss these or other matters via phone or a web call.