Please Note: This commentary only applies to market happenings through Dec. 31, 2020 and was developed before the events of Jan. 6, 2021 at the U.S. Capitol.
Executive Summary
At GWS, we consistently preach the importance of financial behavior coaching — having someone to help you make money decisions rooted in data and research, rather than emotion. Q4 was an exercise in this behavior management.
We saw a significant market selloff this quarter, not unlike the selloff of 2008. While the recovery this time was much faster, investors still felt the same sense of fear and trepidation. The biggest lesson of Q4 was not to abandon your strategy — even when the market has a steep decline, there’s a global pandemic going on, and domestic politics are heated. This is where the accountability your financial advisor provides comes into play.
At GWS, we also continue to monitor and update you on significant political and economic happenings that impact the market and your portfolios. This quarter, major themes were continued economic shutdowns and expansion of the money supply. We constantly evaluate the short-term implications of these decisions, filtering through an objective lens, as well as potential future ramifications.
Q4 Market Downturn
While market downturns can certainly be scary, they have two things in common: they only last a certain amount of time, and they always come to an end. Looking back at historical data, the aggregate amount of time the market is down is significantly shorter than the time it is up.
That said, it is likely we will still have turbulence in the future. That’s why it’s so important to stick to our investment strategies in chaotic times. Remember, at GWS, our planning and investment strategies already include buffers for market downturns. We do a custom cash analysis for each client to understand what his or her specific cash needs are, and we make sure that amount is always available to them. In general, that amount equates to approximately 24-36 months of expenses.
At GWS, we believe this shows the value of contact between the client and advisor and team. Robo advisors can’t empathize with clients in the way that a human can. Our greatest value comes during times like this, when we can empathize with clients and help them make the right choices, rather than choices based upon fear.
Economic Response to Pandemic
The wealth gap in the United States shrunk during the first three and a half years of the Trump administration. We saw the biggest gain among the lower and middle class in decades. According to BBC News, “the latest numbers show economic output surged by an annualized 33% in the third quarter of 2020, following a record fall as a consequence of the coronavirus pandemic.” In fact, the vast majority of people who were affected by work in service industries, which caused the wealth gap to increase again.
The market and economic response were less due to the pandemic and more to the resulting governmental restrictions. At the beginning of the shutdowns, the whole concept was to flatten the curve. Lawmakers created policies designed to flatten the curve, but ultimately failed. While there is certainly some need for a public response to pandemics like this, there should be further consideration given around the cost benefit of the different restrictions.
The question is, was the benefit of slowing the pandemic greater or worse than the cost of closing the economy?
People are going to be very divided over this issue. Do we shut the highways down to save every single life from the possibility of death? Or do we allow certain speeds on the highway, with the idea that there is going to be a certain mortality rate?
There is no easy answer to this question, but it’s not going anywhere in the future. Viruses are going to be with us forever, and we need to have a plan in place for how to protect our citizens while still also protecting the economy.
Expansion of Money Supply
One of our key themes this year was the huge expansion of our country’s money supply. As a result, asset prices were pushed way up. The market will begin the year in an upward trend given the amount of stimulus created.
The Fed pumped money into the economy by putting the country further in debt. And debt ultimately has to be paid back — typically through higher taxes and inflation. This puts lawmakers in a tough position for making decisions going forward. There will be more to come from us on this in future broadcasts on how this will eventually roll out.
When it comes to debt, our view toward governmental debt is very similar to our view of clients’ debt. It’s better to get rid of it, so they can become more independent. That way, when the market goes down, they have fewer obligations that they have to service. It’s a lot easier to cut back spending than find a way to cut back money you owe. That’s why it’s our mission at GWS to help our clients become and remain financially self-reliant.
Another elephant in the room is that it’s possible to have so much governmental influence through regulation, that it moves the country farther away from a true free market economy. It becomes more of a public-private partnership, which is not truly a free market and ripe for abuse and overreach. A phenomenon called “crony capitalism.”
Issue of Election
Before the presidential election, our GWS Investment Committee carefully positioned portfolios to hedge no matter which way the election went. After Biden was determined the President Elect, the Georgia election was the next key issue. Now that Democrats control the Senate, it will be much easier for President Elect Biden to push through his policy, including increased taxes and regulations.
Conclusion
Looking outward at the rest of the year, our investment committee will continue to monitor the market’s response to economic recovery from the pandemic, expansion of the money supply, and a new political party in power.
All in all, Q4 was a good reminder to stay diligent in our investing strategies and keep a long-term view of the future. As 2021 unfolds, be sure to join us each week on YouTube LIVE to hear how we are adapting clients’ portfolios and our investment thesis for the upcoming investment horizon. We’re here to help make sure you’re doing the right things to preserve your wealth, which is part of our mission to help people become and remain financially self-reliant.
Securities and advisory services offered through LPL Financial, a Registered Investment Advisor, Member FINRA/SIPC.
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Disclosures
The opinions expressed are those of John Gatewood as of the date stated on this material and are subject to change. There is no guarantee that any forecasts made will come to pass. This material does not constitute investment advice and is not intended as an endorsement of any specific investment or security.
Please remember that all investments carry some level of risk, including the potential loss of principal invested. Indexes and/or benchmarks are unmanaged and cannot be invested in directly. Returns represent past performance, are not a guarantee of future performance and are not indicative of any specific investment. Diversification and strategic asset allocation do not assure profit or protect against loss. With fixed income securities and bonds, when interest rates rise, bond prices usually fall because an investor may earn a higher yield with another bond. Moreover, the longer the maturity of a bond the greater the risk. When interest rates are at low levels, there is a risk that a significant rise in interest rates can occur in a short period of time and cause losses to the market value of any bonds that you own. At maturity, the issuer of the bond is obligated to return the principal (original investment) to the investor. High-yield bonds present greater credit risk than bonds of higher quality. Bond investors should carefully consider risks such as interest rate risk, credit risk, liquidity risk, securities lending risk, repurchase and reverse repurchase transaction risk.
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