“Hindsight is 20/20.” – Richard Armour, American comedian
What was unclear 12-18 months ago, looks clear as day now.
I knew the market would come back.
I knew we would fast track a vaccine.
I knew the economy would open back up.
Umm, no you didn’t. What’s clear in hindsight was shrouded in a cloud of unknowns in the spring of 2020.
We were hit with a firehose of information, some of it balanced and measured, most of it completely worthless and meant to capture headlines or clicks.
One of the many understated benefits of writing is we can go back and gather insight to our frame of mind. This exercise has two benefits:
1) we are accountable, removing the human tendency to see things clearly in hindsight.
2) we can improve our thought process to make better decisions in the future.
We are anti-forecast here at Pure Portfolios. However, we gave our best guesses to how life, investing, and human behavior might look post-pandemic.
The Great Rotation
Our premise was simple, investing wasn’t as easy as shoveling money into the best performing names. Markets move in cycles. We felt strongly that what worked in 2020, technology stocks, would work less well. What was out of favor, old economy and value names, would likely snap back violently as the path towards normalcy became clear.
Here’s what we said in our 11/12/20 blog, “The Great Rotation”…
Humans are quick to declare extreme endings. The end of offices. The end of brick and mortar retail. The end of airline travel. Will human behavior change due to the pandemic? Probably.
Post COVID, are we never going to work in offices again, enjoy our favorite restaurant, or travel to our favorite vacation spot? Probably not.
Performance can change quickly. One day, you’re a genius. The next, you feel like an idiot. Avoid the extremes, i.e. “tech stocks will go up forever,” or, “energy and industrial stocks are worthless.”
Source: Bespoke Investment Group
The above chart shows sector performance since 9/1/2020 (as of 6/17/2021). The laggards quickly became the leaders as the vaccine rolled out and the economy reopened.
TINA & Valuations
Many old school, value type investors have been sounding the alarm on valuations. It’s true markets are historically overvalued by most metrics. However, valuation metrics offer zero guidance on timing. In other words, richly valued markets can stay that way for long periods of time and vice versa.
Investors should consider the relative attractiveness of other investment opportunities when allocating their capital. In our 10/22/2020 blog, “What Market Bears Could be Missing,” we outlined TINA (there is no alternative to equities) and how this could play out in financial markets.
Allocation decisions are not made in a vacuum. Rational investors are constantly evaluating the ever-changing opportunity set of available investments. In recent market pullbacks (2000 & 2008), investors had attractive risk-free alternatives to equities. In 2020, attractive opportunities to earn a risk-free real rate of return are nowhere to be found.
The most optimistic case for equities is the lack of a reasonable alternative or TINA (there is no alternative). Therefore, TINA is a tailwind that could carry equities higher (for longer than most expect) without an obvious reason.
The Decoupling of the Economy & Financial Markets
Humans think linearly. We find cause and draw a line to effect. This works for most things in life, however, trying to draw a clean line between the economy and financial markets is not one of them.
We’ve seen it lead to huge allocation mistakes i.e. moving to all cash because “markets are completely unhinged from the real economy.”
In our 7/9/2020 blog, “Is the Market Unhinged from the Real Economy” we outlined how the link between GDP growth and stock returns is more random than correlated.
The weak link between GDP growth and market returns might be surprising, but we don’t need to look very far to find examples.
The above chart shows cumulative real GDP growth from 2000-2009 (blue) and the S&P 500 (orange). The real economy grew at a slow & steady clip while the US equity market floundered.
The opposite was true from 2010 to today…
The above chart shows cumulative real GDP growth from 2000-2009 (blue) and the S&P 500 (orange). The real economy grew at essentially the same rate as the previous decade (2000-2009), but the market had a completely different reaction.
It wasn’t uncommon to hear predictions of commercial real estates demise with the death of brick and mortar retail and the work-from-home movement. We felt some of these concerns had merit, but in our opinion, there was plenty of nuance and opportunity in real estate post-COVID.
In our 8/13/20 blog, “Is Real Estate Dead?” we made our case…
It’s tough to predict what normal human behavior looks like post-COVID. However, investors looking to dump their real estate holdings (REITs) because they are down year-to-date might want to reconsider. The indexes have morphed to owning what’s desirable, while less desirable sectors are a smaller percentage of the index. Big institutional owners of “out of favor” sub-sector’s won’t sit idle while billions of dollars are at stake. Struggling properties will likely be repurposed to maximize their utility and provide a return on investment.
*Since our original real estate post, the Schwab U.S. REIT ETF (SCHH) has returned ~27% as of 6/23/21.
The Brilliance of “I Don’t Know”
I had a personal mantra that guided every decision we made at Pure Portfolios in 2020…
“Avoiding stupidity is better than seeking brilliance.”
Sometimes, the best move is keeping it on the rails. In our 6/4/2020 post, “The Brilliance of I Don’t Know,” we embraced not having answers for the unknowable.
We are taught from a young age that answering a question with “I don’t know” is unacceptable. It’s lazy and dismissive. Surely, we can apply some competitive thought and come up with a logical answer, right? Heck, making something up that sounds good, even though we are blowing smoke, is a passion hobby for some people.
I too used to think “I don’t know” was a sign of weakness, maybe even stupidity. In 2020, I think it’s brilliant.
Have an insight or lesson you would like to share? Drop us a line at email@example.com.