When looking through your results for the past twelve months, the sight of our Growth Stocks running up over 50% is literally breathtaking. The fact is that as good as it has been in compounding at this rate, the sunny outlook that promises to carry us even higher also reveals how far back (and down) lie more comfortable equity valuations. And as much as we can control your portfolio exposure from here, the market’s direction depends much more on collective choices, and seldom yields to wishful thinking – especially our own.
If there is one thing we have repeatedly learned over the past 12 months, it is our awareness of “following the crowd” trade and its risks. Investors have long studied these as key to keeping a discreet distance, getting a step ahead, and securing their profits. Yet complacency, lack of alternatives, biases and sheer physics ultimately circumscribe success. What we see with the Federal Reserve and Treasury is that there is no such thing as an uncrowded trade — anywhere. And no matter our inclination, the “Re-Opening of the Economy Trade” expectation is vulnerable.
While we like the idea of centennial reprise for the Roaring 1920’s, for our part, the sustainable path counsels a deliberate pace with a steady eye on the following:
- Vaccinations are up, but the path to global herd immunity looks to run long.
- Solid progress towards recovery faces supply constraints (shipping, chips, training and other logistics and resource limits) that slow the course.
- President Biden’s sizable Fiscal stimuli (Relief and Infrastructure) along with the steady Monetary Policy will help fill the gap faster than the 2007-2009 Great Financial Crisis recovery track.
- GDP could run hot from 4% to 6%, lifting Stocks towards 10% for the year.
- Broad based Infrastructure could finally push the country faster into the 21st century.
- While structural work force deficiencies will make Unemployment sticky, wage growth won’t embed a systematic 1970’s-style inflation.
- Consumer Prices will see supply constraints, but not spur core price trends.
- Interest rates will rise proving more problematic for Debt costs.
- Though in general Bond bearishness is premature, targeted bond maturity ladders remains our strategy.
- Good news will push Stock exposure higher with earnings and the markets.
- Though Cyclical and Value stocks had good results in the 1st Quarter, their earnings reports remain vulnerable, and longer-term, proven Growth Stocks remain the best and the most sustainable way forward.
Overall, we expect an active, upbeat and generally steadier year with Investment Plan returns running in the 4% to 6% range depending on allocation. As always, we welcome the opportunity to discuss our expectations, your circumstances, and the track of your progress together during an Annual Review via Zoom Meeting or phone call.
James W. Mersereau, CFA, CIC
Daniel A. Kane, CFA, CIC