I Can See Clearly Now
It is time to pull out the retrospectoscope. That would be the device that allows you to look back upon recent activity and make judgments that may improve your future decisions. 2020 was full of unexpected surprises. I looked through my notes and double checked. No Wall Street economists or market forecasters predicted a global pandemic and subsequent international economic upheaval. Even though “2020” implies perfect vision, nobody saw it coming.
Yet despite the pandemic, investors have much to be happy about. The S&P 500 recorded a very strong year, as did other major market indicators. Interest rates stayed down, allowing many to refinance or obtain mortgages for new homes at record low rates. Small cap stocks have finally emerged from a long slump and outperformed their large cap brethren in the 4th quarter. I think this is very significant. Further, according to our technical analyst emerging markets broke out of a thirteen year slump, a trend change which appears to “have legs”.
As always with a strong market, there are signs of speculative activity that seasoned investors find worrisome. The Wall Street Journal reported client margin balances are well above the norm. IPO activity set all-time records in 2020, surpassing the volume set in 1999. I remember that party and it didn’t end well. Bitcoin and Tesla have both soared in value, rising over sevenfold this past year. (Please refer to my blog “New Math” dated August, 18, 2020 for some earlier thoughts on this phenomenon.) And just the other night, I heard a market pundit warn about these two bubbles. Dan Nathan did not equivocate: he said “these things don’t end pretty.”
Reflecting on the past year, what conclusions do we make that will help us moving forward? It is pretty clear to me that understanding and emphasizing the basics is a good strategy. Develop an investment allocation that combines your tolerance for risk and your return objectives. Consider reducing investments in areas that have given outsized returns and adding to select underperformers that have solid economic underpinnings. Diversify, don’t make bets on singular ideas or trends. The “religion” surrounding Tesla and Bitcoin scares me. Last but not least, address your mistakes. We should remember that humility is often lacking in bull markets. Perhaps hubris is inversely correlated to humility.
Johnny Nash died at age eighty at his home in Houston this past year. By far his most famous song, “I Can See Clearly Now” soared to the top of the Billboard charts in 1972. We can clearly see the past and use it to help guide our future decisions. We may hope that this coming year turns out to be “a bright, bright, bright sunshiny day”. But while “I Can See Clearly Now” is a hopeful song, investors should not think that they can clearly see the future. Please keep that in mind.
Ralph McDevitt January 1, 2021
Any opinions are those of Ralph McDevitt and not necessarily those of Raymond James.
This market commentary is provided for information purposes only and is not a complete description of the securities, markets, or developments referred to in this material. Any opinions are those of the author and not necessarily those of Raymond James. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation to buy, sell or hold a specific security. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor's results will vary. Past performance does not guarantee future results. Diversification and asset allocation do not ensure a profit or protect against a loss.
