We are fully invested
The news is very, very positive: LaIF’s Core/Satellite approach has proven to out-perform over the past five years. We built up top-rated bond positions when interest rates spiked four years ago and then enjoyed both price and yield developments until a couple months ago. By shifting from long term bonds into cash already early last year and since November 6th (as soon as the US election results were clear) into equities, our clients have been participating in the megatrends with considerably reduced risk. And in two to four years, once interest rates are substantially higher, we can once again build the core (largely high-quality bonds) part of our portfolios. This is aligned with LaIF’s Financial Planning strategy to help our clients prepare for retirement and for their children’s inheritance.
In my last market commentary on May 27th, 2020, “How to Navigate the Current Market”, I explained that we were holding high cash amounts due to considerable uncertainties. Some of these “clouds on the horizon” stemmed from unaddressed fundamental problems around the USD as a global funding currency as much as the global pandemic. But the biggest issue weighing, was the pending U.S. election. Nevertheless, I advised to participate “tactically” and buy on dips the following stocks. We did buy; and here are the respective performances since then: Zoom Video Communications (+100%), Beyond Meat (+12%), Marvell Technology Group (+32%), FedEx Corp (+93%), Clean Harbors (+41%), Waste Management (+17%), Etsy (+160%), Bitcoin (+488%) and iRobot Corp (+60%).
However, we did not fully invest the liquidity available according to each of our client’s chosen, LaIF Risk/Return Strategies (there are five) before the U.S. election results were clear. Then we invested in full. And one of our big wins has been an overweight in marijuana stocks: the U.S. has been legalizing marijuana State by State since mid-last year, and one such holding was recently acquired by a pharmaceutical company and jumped by 80% overnight.
The health of the world economy has been greatly influenced by the uncertainty directly linked to the erratic US leadership during Trump’s populist tenure. With Biden/Harris at the helm, and the Democratic control of Congress obtained in January, uncertainties have plummeted. Although the way is long and arduous, the way forward is clear. The transparency and efficiency with which the new administration is successfully implementing the vaccination rollout – far in advance of Europe – is tantamount to proof of this transformation in an astonishingly short period of time.
The recent spike in interest rates is of course causing pain in both the stock and bond markets. However, this will be short-lived, it is simply a signal to rebalance from overweight in (essentially NASDAQ) growth stocks into value: it is a clear buying opportunity. The Federal Reserve Bank Chairman Powell did the right thing to signal that interest rates will be allowed to rise after a 40-year downward trend.
Rising rates serve to stem inflation: it translates to lower corporate borrowing and spending. This will only slow down early-stage growth companies that depend on low borrowing costs. Other sectors will catch up as the economy grows and the pandemic is overcome. And meanwhile, the Covid Stimulus Program which just passed in Congress will help the people on “Mainstreet” who so badly need it. The future is bright and abundant.