Investment Game Plan for the Remainder of 2020
Last week’s market action was crazy, some of the most erratic behavior I’ve seen in years. It stands to good reason as investors are about to go over the battle wall of time and have no idea what to expect next. In a rare form of clarity for us, the game plan for the rest of the year and into 2021 actually seems pretty clear and we’re very excited about the opportunities and prospects developing. Wherever and whenever the current correction in stock prices ends, investors should be ready to jump into the buyers’ seat following this game plan.
The Economic and Market Landscape
With no doubt, making money in the markets from here is going to take a lot more skill, experience, and knowledge than any time in the last decade. As they say, don’t confuse brains with a bull market. The character and features of the bull market as we have known it since 2009 are on the cusp of changing dramatically. That doesn’t mean the bull is over but rather we shouldn’t expect it to persist in the same form. Today we usher in a new kind of market landscape. The new landscape will require quite a few changes for investors that aren’t going to be comfortable or familiar. Specifically, we’ve talked about the importance of reallocating to a “durable” portfolio which we’ve discussed many times in the last year. Generating consistent positive returns over the next several years will require you to own things that you don’t recognize or have never owned. Investors will have to get uncomfortable and accept higher volatility with their portfolio balances in order to make money by investing in assets that have naturally higher daily price swings. But make no mistake, we are staring squarely at some of the best investment opportunities we have seen since 2008. Wise investors will make money by embracing these new opportunities while those who are married to their past winners will grow more frustrated with persistent losses, hoping and pining for the way things used to be.
Side note – Most of what we offer in this update, has little to do with who wins the White House or congress. These themes are not political as much as inevitable outcomes from catalysts and trends that have developed over years of Democratic and Republican leadership.
There is too much to go over here to cover with normal journalistic writing. I’m going to break it down to bullets with a little commentary for easy digestion.
Investments with Big Opportunities
- Renewable energy – This sector has been on a tear for years under Trump and will only accelerate under Biden. This is a megatrend in its first phase.
- Infrastructure – Government spending on infrastructure is inevitable as our country is literally falling apart structurally.
- New Tech, not Old tech- FAANG investments are now very high-risk positions for investors. Lean into the new disrupters, Innovation, smaller tech companies with much higher growth potential.
- Equal weight not concentrate – Know what you own. The S&P 500 is now a proxy for Apple based on its capitalization-weighted construction. Instead, find funds or ETFs that offer equal weighting of underlying holdings (not price or capitalization-weighted).
- Orient toward inflation – This is now a thing. Sectors and asset classes that benefit from inflation should be on your buy list.
- Start building toward the Value side of the market. This is perhaps one of the greatest opportunities we see today. 2021 should be the kickoff of the long-awaited Value trade at the expense of growth. Start building your positions between now and year-end.
- Orient toward companies that save you money – This is the domain of stock pickers but leans into cost savers. Software is cheaper than people, Electric cars are cheaper to own than gas cars, healthcare technology can help you save! When inflation arrives in full color, these companies will thrive.
- Select REITs, MLPs, and other commodity producers paying high income are in a sweet spot now with very low prices, tons of value, and high dividends. Pick them up as they turn higher but be very selective. Understand what you own and why!
- Emerging Markets – Emerging markets and internationals may be taking over leadership from the US on a longer-term basis. A bottom in Commodities and natural resources plus a falling dollar, lower valuations, and higher growth make this one of our favorite themes for 2021 and beyond. Consider moving to 50/50 domestic to international holdings for your equities.
- Currency debasement – The US dollar is going to be under pressure for a long time. Own things that benefit from currency debasement like gold, silver, even cryptocurrencies in small bits.
Things to Avoid
- Bonds – almost all. We find nothing attractive about corporates, treasuries, or municipal bonds at these price and yield levels. Yields today do not square up with the risk of owning bonds at these prices especially as inflation continues to climb higher. We’ll scoop them up when they are more attractive later in 2021/22.
- Mega cap tech (FAANG stocks) – Could continue higher but there are much better opportunities with more attractive valuations, fewer headwinds, and lower competition.
- Passive Indexes – The 60 (stock)/ 40 (bond) portfolio is already unproductive. We will again respectfully urge any and all to evaluate the return potential of your standard 60/40 portfolio. The prospects for gains with this mix is almost zero until we see prices in both stocks and bonds fall dramatically and reset.
- Real Estate – This one is too tricky to call but generally we would be a seller, not a buyer, or builders. Price gains have been pulled forward by maybe 3-5 years and we see higher ownership costs looking forward (property taxes, utilities, home upgrades). Rising costs and lack of available building materials is going to be a challenge for builders and anyone trying to fix and flip. Rents in San Fran are down 23% already, commercial property is seeing some deep discounts. Residential may hold up based on short supply but we’re already seeing mortgage delinquencies rising. We don’t see much future opportunity here.
Time to Pay Attention to Taxes Again
Taxes are coming from every direction. The US is essentially bankrupt as a country and many states are not far behind. Taxes are going up regardless of who is in office. Trump cut taxes for corporations, but they had little effect on most taxpayers by eliminating deductions like SALT (state and local tax deductions). Republicans raise taxes by eliminating deductions. Democrats raise taxes by increasing the marginal tax rates but adding back deductions. Again, it doesn’t matter. Big government needs big tax revenue to stay solvent or face some very unsavory currency devaluation issues. Starting right now, every investor should evaluate where they are exposed to taxation (Income, cap gains, dividends, property, sales). After-tax investment results will be far different than tax-deferred investment results. Our team of tax strategists and tax-efficient investment strategies can help you find shelter.
This is the game plan for the rest of the year and probably well into 2021. As always, investors should follow actual price trends and manage their net exposure according to their personal capacity for risk and portfolio volatility. This is what we do for our clients adjusting and embracing new leadership as it unfolds. There is a lot of money that will be made and lost in the next 12-24 months. You need to be on the right side or find someone who can get you there.
Good luck to us all tomorrow and through this election cycle. I am voting for unity and cool minds.
Cheers
Sam Jones
