following the light 2021 portfolio considerations
Following The Light - 2021 Portfolio Considerations
By: John Harris, Managing Director & Chief Weatlh Advisor - Mason Williams, Managing Director & Chief Investment Officer - Michael Unger, AVP & Investment Officer
Cocoplum Living Magazine, March 2021
Election results combined with positive news in and around the ongoing battle with COVID-19 have finally provided us a clearer path forward in 2021. The fog of 2020 is beginning to dissipate as positive news regarding vaccines and their improved distribution provides markets, companies, politicians, and the populace much-needed clarity on the future. The improved stability and clarity of a post-COVID-19 world provide market opportunities that are and will continue to play out. As such, this is an important time for everyone to review and adjust their investment portfolios.
However, before we look forward, it is important to revisit what brought us here. Looking back at the challenges we faced this past year as a nation, we have all witnessed acts of kindness, courage, and ingenuity as we swiftly adapted and navigated through these unprecedented times. With multiple vaccines reporting positive and effective late-phase trials, November quickly reminded investors what markets could be in a world where COVID-19 is under control. This encouraging news boosted expectations of stronger economic growth for the new year and gave way to a rotation to more cyclical sectors that perform well when the economy is improving. The S&P 500 ended the year at an all-time closing high, returning +18.40% for the year with most of the appreciation occurring in the fourth quarter. The NASDAQ had a phenomenal year returning +43.60%, as big tech and software companies were among the most popular this year. Small-cap, as measured by the Russell 2000, had its best quarter ever returning over +31% indicating that the market believes a recovery is on the horizon. The market's resilience and ability to look past short-term disruptions allowed it to surpass pre-pandemic all-time highs in only six months, but the road to recovery certainly has not been smooth.
We believe volatility will continue as issues surrounding COVID-19 and the restrictive policies enacted to contain further spread and loss of life, are being weighed against an unprecedented vaccine distribution effort that provides hope of a return to normalcy.
The newly established Biden administration has detailed plans to accelerate vaccination rollouts and provide further stimulus to individuals to weather the continued restrictions. The benefit of these activities should allow for a speedier recovery and eventually turn savers back into spenders for busi-nesses hurt by these restrictions. The potential cost is the unproven nature of these efforts combined with greater deficit spending and higher overall U.S. debt. Fortunately, inflation does not present itself as a near-risk as there is too much slack in the labor market and it will take a while for the economy to get to operating at full capacity.
Turning to other matters of the markets, momentum seen in the later part of 2020 continued into 2021 with small caps and emerging market stocks taking the lead. One trend that has been overlooked by investors was the turn to value stocks that began late last year; we believe this trend will continue as the global economy improves and normalizes. In 2020, only a handful of stocks were responsible for the return in the S&P 500 leading to one of the shallowest markets in years. Investors are hopeful that 2021 will be more evenly balanced between growth and value. On the international front, China appears set to resume a path of strong growth in both its economy and financial markets. Despite being the center of the pandemic out-break, China's draconian restrictions allowed them to succeed in sup-pressing the virus. Although the new administration in Washington will provide China with both challenges and opportunities, we believe it is important to focus on the benefits of maintaining a global long-term diversified perspective. History shows that foreign stocks tend to outperform during periods of U.S. dollar weakness, which is a trend that is starting to take shape.
This trend bodes well for U.S. investors using foreign investments in a diversified portfolio. With a multi-year trend in place with the U.S. outperforming foreign territories, statistics show that foreign investments are under-allocated in investor portfolios. In the bond market, long-term interest rates rose above one percent for the first time since March 2020 in anticipation of higher economic growth. Meanwhile, short-term interest rates will remain pinned to near zero through 2023 as the Federal Reserve waits to normalize interest rates based on the speed of the recovery. For investors, this means that fixed income returns in 2021 will be limited to the coupon income earned on the bonds rather than price appreciation. Investors seeking yield should look to dividend stocks that can provide an income stream that surpasses current bond yields with the ability to rise over time. In addition, dividend stocks currently find themselves at a competitive advantage when looking at relative valuation especially when compared to the very-high valuations of certain pockets technology sector.
The well-known adage "time in the market beats timing the market" held true in 2020. Upon a quick glance at how stock markets performed in 2020, one would scarcely know that anything was amiss this year, let alone a once-in-a-century pan-demic and a dreadful global recession. However, the markets have not been a perfect reflection of economic activity. Instead, they proved very resilient in 2020. Nonetheless, the light provided by the prospects of a post-COVID-19 in 2021 has produced several important portfolio considerations, including:
1) Reallocating to have a proper value/growth balance
2) Increase the global allocation
3) Increase the allocation to small-cap
4) Avoid taking excessive bond risk/look to dividend-paying stocks
5) Good time to get an overall portfolio review.
At the end of the day, having a well-built diversified portfolio is a solid step towards financial freedom but having it run parallel to a detailed financial plan will ensure success in reaching one's long-term goals no matter what market environment investors face.