Originally published April 5, 2021
The American market continues to rotate in and out sectors as it continues to shy away from the ever-popular technology sector. In the last month, the big winners were materials, industrials, and utilities which all gained about 7% while tech and communications only advanced about 2%. As a result, my portfolio fell behind a little as it is weighted heavier on financials and energy, both of which took a breather this month after a strong February. If you are mostly invested in the Canadian Market, congratulations, after many years of lagging, the TSX is up 9%, a full 2 points ahead of the SP500…it was bound to happen sooner or later.
The Short Term
My market outlook has started to change to a more positive short-term view. There are reasons to be cautious, but this is true almost always in any part of the business cycle. I would say that for the next 1-3 years, it is likely that returns will be ok. Going out much further in time, however, there is a good possibility that returns may be negative or at least be lackluster for quite a while and a bear market (big 20% drop or more) is not out of the question either.
More specifically, I am starting to think that in the short run there will be a pent-up demand boom powered by cash-rich Covid prisoners finally being released into the spending economy. This will likely lead to widespread inflation as the prisoners bid up all consumer assets and services and in fact, we have already seen asset inflation in the forms of real estate and the stock market gains. Simply put, there is a lot of locked-up cash in the system and it’s looking for things to buy. The only reason consumer goods have not overall increased in price (inflation) is that there is little velocity of money or said in a non-economic way, people are physically unable to spend money as quickly as they would like. Governments have stated that they are willing to put up with some inflation in order to get the economy back on track. Once this is achieved, they will then put on the brakes by cutting spending, raising rates, or lowering the money supply.
The tricky part of government intervention is to avoid slamming on the brakes too hard or letting the economy run too fast. Getting it just right is what will determine how the markets will react. In theory, if done in a measured way, returns could be quite normal. Done poorly, we could see a stock market bubble (some say we all ready have one) or a multi-year market contraction. History has shown us that if the government panics over inflation and slams on the brakes, returns will likely be below average for years. Contributing to this view is the fact that the market has had a few years of great returns, which some view as being too exuberant and out of alignment with the rise of corporate earnings.
The Long Term
The stock market in the long run is a reflection of long-term earnings after all. This suggests that an overbought or expensive stock market will return to its averages by having many years of less than average returns. For example, Japan circa 1990 experienced such a contraction that a stock market bubble led to over 20 years of underperformance. Simply put, Japan’s 1990 exuberance drove stocks so high that the fall back to normal levels took decades. That is an extreme case, but even North American markets have had the odd ten-year period of underperformance over time.
So what is the small investor to do?
The smart ones play the long game. Historical averages are 9% plus or minus and can only be achieved with time. You take the good years with the bad years and keep risk down by being as diversified as possible, across sectors, countries, growth, value, and even different asset types. Personally, right now, I am looking for stocks that although boring in appearance will provide good returns because they are overlooked and out of favour. Verizon is a good example of a boring out-of-favour stock that Warren Buffet just bought. Even he could not get people interested in it and the stock actually fell after his purchase. Verizon has a 4.5% dividend, slow steady growth, and is involved in the 5G rollout. I am also looking abroad to Asia and other foreign countries to create more diversification over time.
As for switching into bonds in a rising rate environment? It’s a good question, and for the most part, historically over long periods, bond returns rarely beat the stock market. Should inflation get out of hand causing rates to increase to very high levels as seen decades ago, certainly there is an argument to switch and capture a high yield bond. This scenario would take quite a while to play out and timing this correctly is very difficult. The biggest problem is that bond values fall as rates continue rising… yuck.
So enjoy the short term while it lasts, like all good things it will come to an end. Just remember, this is the way of the market and to be fair, it’s normal. The purpose of my newsletter is to continue reminding myself that ups and downs are ok, nothing to be frightened of. This non-emotional view can provide an edge over others in the long run. As most of you know my goal is to achieve market-like returns and more specifically, consistently beat the market by 1 to 3% whether in an up market or a down market. Over years, a 1-3 % outperformance is huge, it will add over a million dollars at retirement.
Happy investing.
Marc’s Monthly Moves
Nada.
Marc’s Portfolio YTD Performance
- Portfolio return 5.2% (Including currency losses/gains)
- Portfolio return 6.4% (without currency losses/gains)
- SP 500 return 7.0%
Portfolio under performed the SP500 by -0.6 points.
Money with Marc 