Investing In A Biden Era Economy
January 20th, 2021
Within our previous articles, we discussed at length, the potential implications of unknown election concerns on the economy, and by extension, on consumerism and the behavior of consumers in a Biden Administration era.
Within those articles, I discussed the potential for the market’s reaction as uncertainties became known. About one month ago, I encouraged everyone to remain invested and true to their long-term objectives, while being defensively hedged during this period of time.
Today, many of those previously unresolved election related concerns are now known factors. Fortunately, we haven’t experienced another volatile period of melting algorithms similar to what we experienced in February and into March of last year related to COVID-19 concerns
However, we are beginning to see what is in my opinion, a sector rotation, away from pure growth, high beta assets and into what have historically been more conservative, defensive, and lower beta, dividend generating holdings. In just the first few weeks of the year, I have observed quite a few pure growth, high beta stocks that performed well last year, lose 20% or more in value so far year to date. Conversely, we’ve seen quite a few stocks, in sectors that didn’t contribute much to the rally from March of last year, that are performing strongly just three weeks into the new year.
Just since Christmas Eve, we have observed a noticeable rise in the yield of the 10-year treasury bond, and we have also observed a very demonstrable rise in the price of oil. Furthermore, asset classes that lagged the rally from last year, are now leading market sectors in just the first few weeks of this year. I believe this is the market looking ahead, and beginning to make the adjustments that we’ve discussed in the past, as it considers the factors that will likely have an impact on the economy going forward.
At a very high-level, I have offered the following analogy to my clients. The shorts and a T-shirts that you were wearing in July, are just not the best articles of clothing for the weather in January. Seasons change. Economic seasons change. Today, it is time for the jackets and the jeans. Following that analogy, we are encouraging clients to adjust portfolio holdings to reflect the season into which I believe we are changing.
I do not believe that we will observe an attempt to undertake massive tax reform in this year, but that is very likely in the following year. Therefore, this sector rotation could give us an extended opportunity for the reallocation of portfolios when suitable.
Within last month’s video, I strongly suggested that this is not the time for a portfolio to be left on auto pilot. This is the time for proactive management, with an eye toward the future. The question should be, where are we going, and why? Today, I would strongly encourage everyone watching this video to be more concerned about that question rather than being complacent with where we have been.
As I have discussed previously, I believe that we are entering into a new season that will be characterized by slower velocity of money, higher treasury yields, higher inflation, weaker dollars, and a change in consumer sentiment away from discretionary spending in favor of a more cautionary focus on consumer staples spending. Corporations will become more cognizant of the higher tax environment within which they must operate. All of these factors will have an impact on the economy, and by extension the market.
At a very high-level, I believe that some of the traditional, slower growth and dividend paying sectors will likely show strength over the coming years. Under the economic and fiscal spending initiatives of the Biden Administration, and given the potential for changes in future tax policy, I believe that some emerging, and nontraditional sectors of the market could also perform well.
However, I would caution against simply adopting a basket of utilities for example at the surface level. You must dig more deeply to eliminate certain candidates that might be very positively correlated to fossil fuels for example. Likewise, I would advise against adopting a broad level basket of pharmaceutical stocks, but would prefer to hold those that are diversified in product line, and with a wide moat.
I could certainly continue along these lines, but for the purposes of this video I would suggest that if you work with a financial planning professional, engage that person frequently at this time. Determine where your strengths lie, and identify where weaknesses may exist, as a function of where we are now, and where we are potentially going, as it pertains to changes that will likely come with a new administration.
Do this, with an eye on the long-term financial plan that should be guiding you toward the objective of your stated investment goals. In closing, in last month’s video I suggested that there is usually always something to hold in your portfolio. However, there is an art to knowing when to hold certain things, and why. You must always be aware of how the economic seasons are changing so that you can recognize the opportunities for portfolio adjustment. Complacency is not an option.