March 2021 Update

March 2, 2021
February/March 2021 Update

Spring is on the way. After sixteen brutal days of consistent below-freezing temperature in February, high thirties in Buffalo feel like it is time to get out and celebrate by cleaning our yards and garages. Vaccine production and delivery are ramping up, and with J&J vaccine approved its starting to look like most of us should be able to be vaccinated by the end of June. I can tell from our conversations that many of you already have plans for this summer, and that all of us are ready to get out there and start appreciating, even more, what life has to offer.

“You cannot have your cake and eat it too”. I hear this a lot lately in conversations about Inflation. The fear of rising inflation is definitely keeping managers and investors up at night. With so much stimulus around the world and expectations of 5% and 7% GDP growth, can we really expect low inflation to persist? Secular low-inflation was a result of globalization and technological improvements in productivity. One of the two factors has weakened noticeably with the rise of populism, but the other one is proving even more influential and powerful through this global crisis. If our policy managers in the Fed and the Treasury Department did not react with resolute and appropriate response, I am sure we would be revisiting the Japan’s experience in our conversations and worrying about possibilities of deflation and a much-delayed recovery. Rates will be rising, and we should be happy about it as long as there is no hyperinflation. Over this year and in the future, we might get to 2%+ inflation and potentially long-term rates that resemble our historical average, but for now, lets allow the global economy to run its full recovery.

We stay equity bullish with news on vaccines, liquidity, low interest rates, and additional stimulus continuing to confirm our expectations and the short-term outlook. Any negative news on the above-mentioned factors should be expected to reflect in the markets, just as the spike in yields did last week.

Our focus in 2021 remains on high quality cyclical and value stocks while still maintaining long-term positions in quality growth. Traditional deep value stocks may not regain their full historical strength due to long-term changes in economy. Think of it in terms of comparison between traditional retail versus banking, or traditional energy versus industrials. In both pairs, the second sector maintains the quality of their financials while the first one is significantly damaged by social-distancing response to the crisis, with extra pressure coming from the prospect of losing some of its purpose over time.

Additional reason to stay overweight in equities is our expectation that bond yields will continue to climb. Please remember that the long running bond bull-market died out in 2017, and was just confirmed dead in 2020 with historically absolute lowest interest rates. Holding assets that pay very little, while taking risk of potential loss on principal with interest rates starting to rise, does not make much sense. On the other hand, we believe portfolios should be diversified, and that means holding different kinds of assets with low correlation to each other. We are not in favor of large fixed income exposure and we prefer to focus more on parts of that market that can react positively to the increase in inflation. We also like alternative investments that are event driven with target returns, or are generating income. It is really important here to always remember that the Fed can control very short interest rates, having only limited influence over long-term rate expectations and rate movements. Commitment to the accommodating monetary policy does not mean that the rates will stay this low for a longer period of time.

Increased yields and the potential of increasing taxes hurts the tech sector more than cyclical ones. This is due to the way we calculate value of stocks in tech sectors by primarily discounting expected future earnings by the expected interest rates. We continue to believe in the long-term potential in the tech sectors, but from here on, the quality of financials, diversification, and the thematic focus become more important.

We’ve seen increasing positions in emerging market and small/mid cap equities became a popular trade for the first quarter. Our belief through the last summer was that increased liquidity, improvement in fundamentals (especially in Asia), and a turn in the currency movement with continued weakening of the US dollar would benefit both of these asset subclasses. The thesis started being confirmed in late fall with investors enjoying benefits on both performance and diversification sides since then.

We are happy to say that all the final 2020 tax documents you should be receiving from Wells Fargo Advisors were generated and mailed out as of February 24th. If you do not receive them in the mail shortly, don’t hesitate to reach out to our office for help.

Mary and Allie have been working on reestablishing the 2021 Automatic Required Minimum Distributions from your retirement accounts. If you haven’t already received a call and/or the necessary paperwork from our office, please be expecting a call in the coming weeks.

Please continue to play it safe and protect your and your loved ones’ health as much as possible. We are here for you in all matters financial. Just reach out if you need us.

All the best,

Emir Culov
Partner, Portfolio Management Director
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