Broker Check

January Newsletter

“We’ve Added Cheerleaders...”

The world was transformed in 2020 with no shortage of headlines regarding Covid-19. The economic shocks from the pandemic are likely to reverberate for the foreseeable future and impact our world for several years in ways not yet determined.  Everyone was effected this year, whether it was mandated changes such as wearing a mask to avoid the Virus, watching a loved one who fell ill or witnessing the political reactions on how to address the pandemic.  This all created extreme market volatility in 2020, with stocks hitting record highs at the start of the year, before worries about the pandemic pushed US markets into a spiral in February and March. Subsequently, in the months that followed the announcement of promising vaccines, equity markets were pushed higher to close out the year with all-time highs.

 Although there are many reasons for the market’s comeback, including the Federal Reserve’s massive intervention, the staggering rally is still difficult for many investors to comprehend.  While stocks managed to charge higher in the final months of 2020, many economists do NOT expect the US to recover all of the jobs lost during the pandemic until 2023 or later.  Many observers say the market is disconnected from current reality, but the stock market is traditionally forward looking.  We have also noted an increase in new investors coming into the markets with stay-at-home day trading, fueled by trading “on margin” with low interest rate borrowings.  These new “Cheerleaders” may have driven equity valuations to unsustainable levels.

With planes grounded and travel grinding to a halt, prices on crude oil fell as prices on oil futures unbelievably went negative for a period during 2020 as Russia and the Saudis began manipulating supplies and oil production. Some believed this was an impetus to a phasing-out of fossil fuels, as California and many European countries announced plans to ban the sale of new gasoline and diesel cars by 2035. It made us pause and decide to eliminate funds from the portfolio directly tied to oil. To help reduce market volatility, we added more Alternative Equity positions to produce needed cash flows and an inflation hedge.  As money trickles into the economy and the Virus threat lessens, we will draw those positions down in 2021 and add back energy positions to our Alternative Equity portfolio to benefit from real economic recovery.    

Our tactical decisions throughout 2020 not only protected downside risk but added real growth to the portfolio!  The Alternative Equity portfolio returned a solid eight percent in the second half of the year along with a five percent yield.  For the full year ended December 31, 2020, Gladstone Land had a 23.88 percent return and Cohen & Steers REIT returned over thirteen percent.  We were very pleased to see the Global Allocation fund (BlackRock Global Allocation)  returning 25.5 percent on the year leading that category, rivaling the one-year returns for the Domestic Equity category at a 22.96 percent return.

 For the aggregate portfolio that we manage, we saw a one-year net return slightly under seven percent.  The Equity portfolio returned almost nine percent while the Income portfolio returned over seven percent.  Please see your enclosed 2020 Portfolio Reports to see how your individual portfolio performed based on the allocations tailored to meet your goals. 

 Although more progress is needed to control the Virus, the TD Ameritrade economists projected data shows that beginning with the second quarter 2021 GDP growth projections will be about four percent for the rest of the year, decreasing to between two-to-three percent in 2022. This sets up an opportunity to realize some growth within traditional energy exposure.  As noted above, we plan to add back to our Equity portfolio energy funds poised to benefit from an energy recovery in 2021. 

 As part of our commitment to investing in innovative technologies,  we have added Columbia Seligman Premium Technology Growth Fund to the portfolio to bolster our technology exposure.  This fund has a current six percent distribution rate and a proven growth track record. 

As I write this letter it now appears that the Georgia Senatorial run-off election has been decided in favor of the two Democrats, putting our government in control by the Democratic party.  Although the majority is not by more than a few points, the expectation is that the Biden proposals to increase government run programs, increase regulation on corporate America and increase taxes to pay for the expanded role of government, could subdue economic expansion and lower corporate earnings, impacting equity valuations.  Our job as your investment manager will be to continue to navigate the muddy waters balancing risk and returns to meet your long-term financial goals.

 Please let us know if you have any questions regarding your reports or if you would like any guidance with your overall financial planning. We look forward to a recovering US economy as we get through the first portion of the year and stronger and safer 2021. 

 

Sincerely,

 Intelligent Investment Management, LLP