November 2, 2021 Growing up, my small-town McDonald’s hosted birthday parties, had Ronald McDonald roaming the restaurant, and both delivered food to the table andread more
Back to Basics in a Complex World
February 2, 2021
Last year was unlike any other year in modern history as it was filled with emotion and uncertainty, yet it also showcased just how adaptable we can be as technological adoption accelerated and changed the way we did almost everything, seemingly overnight. Many new developments—such as telemedicine, widespread eCommerce, and Messenger RNA vaccines (like those created by Moderna and Pfizer)—will likely change our behavior and the way we continue to innovate for many years to come.
Financial markets also experienced a remarkable year with the fastest stock market correction in history followed by an equally fast and surprising recovery. There were also many investing lessons that were repeated time and again throughout this emotionally tumultuous year. However, rather than being brand new and innovative, they were—like a classic proverb—timeless concepts that had been previously reiterated for years. They were a great reminder that, when it comes to investing, it is critically important to have a deliberate game plan in place and stay disciplined to it especially during periods of extreme market fluctuation.
The importance of this type of commitment is one of the tried-and-true rules of investing but, as simple as it sounds, it is almost basic human nature not to practice it. During the depths of market loss and uncertainty, it is easy to succumb to powerful feelings that circumstances “this time” have changed and that history will not repeat itself, so better to cut one’s losses, get out, and avoid potential future damage. Indeed, several of these rather extreme uncertain moments presented themselves last year—the first of which began in early March and lingered well after, and the second that began in September and persisted all the way through the contentious election. Judging by the $5 trillion of cash that was sitting in money market funds before the Presidential election, many investors raised cash in March and then waited to re-invest it until the “coast was clear” and the uncertainty of the election was over; but this caused them to lock in losses and then miss the significant, and swift, stock market rally.
In contrast, during those early days of March, we felt confident that this event-driven recession would be relatively short-lived given our view that the economy was healthy when the pandemic began and would be well supported by the trillions of dollars of fiscal and monetary stimulus that were effectively enacted almost immediately. Throughout March and April, we added to large, mid and small-cap stocks as well as commodities with the view that they would all likely recover within a year’s time. Admittedly, we did not expect them to recover within just a few months’ time; but, nevertheless, being disciplined by staying invested, rebalancing and adding exposures when the market was down created significant value for our clients. This is the essence of what we strive to do.
As the election approached, political tensions were incredibly high; and in turn, the media focused on a worst-case-scenario unfolding. In our view, though, the one element that the market dislikes more than anything else is a negative surprise, and it became hard to imagine what that might be given the general view that the election was already likely going to be ugly with a delayed, and potentially contested, outcome. Concurrently, there were also several probable positive announcements that we expected by year-end such as the findings from late-stage trials for the many vaccines that were being developed, as well as another round of fiscal stimulus. Hence, we chose to stay fully invested during this time and even though the election results were unresolved, the market began to rally immediately following election day. This post-election rally caught many by surprise and within a week’s time, the S&P 500 was up another 6%, small cap stocks were up another 8% and international equities were up another 7%.
During the last two months of last year, we learned that there was not only one, but three, highly effective vaccines on their way to being approved and this led to an even more significant recovery in economically sensitive sectors such as financials and energy, plus small cap and international stocks. Meanwhile, large cap technology stocks, that did so well earlier in the year, took a breather, underperforming the broader market in this final stage of the year. While it has been easy to lose sight of the importance of staying diversified over the last decade when large cap technology stocks routinely outperformed just about everything else, this recent moment was a great reminder that it can be hard to predict shifts, or how long they might last; and we can’t always rely on history to guide us in deciding what might work next. In our view, this shift in market leadership could continue as the economy recovers and potentially causes other sectors to grow earnings at a much faster pace than traditional growth sectors.
And yet, the technology sector is one that we added to back in March, when we saw real value in the oversold situation; but then, following the strong recovery, we decided to reduce this exposure over the summer and shift into more cyclically oriented sectors. As our conviction in this shift grew, we added additional exposure to these other lagging sectors late in the year. Even though we expect the fundamentals of the technology sector to remain very strong, we could see growth rates decline sequentially in 2021 given the incredibly strong rates of adoption many of these companies already experienced in 2020. This has typically led to valuation multiples coming down as investors are usually only willing to pay a high historical premium when growth is scarce and accelerating.
As we look to what the future may hold, we continue to be humbled by the healthcare crisis that the world is grappling with. However, we are also of the view that a global economic recovery is underway and that we may look back on this time in history as one where a significant leap was made in the adoption of technology and the ability of scientists to enact meaningful change within healthcare. These elements may prove to be so significant that they could positively impact generations to come. Meanwhile, when it comes to investing, things like getting back to basics and staying disciplined, rebalancing during extreme moments, and maintaining diversification will always, in our view, be tried and true.
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