As 2020 comes to an end, I wanted to reach out and wish everyone a Merry Christmas and Happy Holidays! I also wanted to congratulate everyone for making it through this year as it’s going to be one for the history books. Luckily, 2021 is almost here to offer us a fresh start with (hopefully) a lot less news bombarding us on a daily basis.
Aside from wishing everyone a happy holiday, I wanted to pass along some of the year end planning work, a quick synopsis of current market conditions, and a look ahead at 2021. Perhaps the biggest news for my planning practice is that our family will (hopefully) be moving to a new home at the start of next year. The pandemic made it obviously clear to us that a family of four needs more than 1,080 sq ft and a single bathroom to live. What this means for clients is that I will finally have a home office to work in again!
Between the small space, kitchen table work environment, constant noise and news, it’s been a challenging year. We’ll all soon be returning to a new normal with the eventual end of the pandemic on the horizon. I’m hoping my family’s move will allow me more time to focus on making my client’s lives a bit easier as well. While I expect January to be a busy month, I plan on reaching out to clients to start scheduling review appointments for the year. Until then, enjoy the holidays!
December Market News
I made a decision to keep quiet during November’s election. That was mostly due to the wild volatility and the many unknowns out there. Now that the Electoral College has verified Joe Biden’s victory, most market analysts are predicting a smoother running economy moving forward. That doesn’t mean all is well.
The Trump era brought many interesting new approaches to governance and economics. While we may not notice for some time, there will be repercussions. One such example is the stimulus spending that the pandemic necessitated. Over 21% of all money in circulation was printed in 2020. The Federal Government created $6.5 trillion this year alone. Exacerbating this issue is the fact that 78% of all money in circulation has been created by fiat since the Great Recession. How this ends is anyone’s guess, but history is full of worrisome parallels.
While inflation has not been much of a factor in the economy yet, the deluge of new money has caused the stock market to soar. November has some of the best returns of the year though the major March correction means that the market has only seen a 13.73% return year to date. Unfortunately, the growth has not been spread equally among sectors. For the most part, a handful of technology-oriented stocks outperformed the market as investors adjusted to a stay-at-home economy.
The contradictions in the market have muted much of the analyst’s market predictions over the last few weeks. Reports on the short-medium term outlook remain as varied as our political opinions have become. Long term buy and hold expectations remain low, which places a greater risk for new investments.
Some of the most recent IPOs illustrate analysts’ concerns about the market being overvalued. Both AirBNB (ABNB) and DoorDash (DASH) had IPOs last week that brought a combined market valuation of $169 billion despite the fact that the two companies only generate $5.8 billion in revenue. Tesla (TSLA) paints a similar picture of an overvalued market as well.
Tesla, which will soon be added to the S&P 500, is currently trading at $609 per share. In December of 2019, a share of Tesla cost around $66. That same share cost $61 in December of 2017 and $70 in December of 2018. At $609 a share, Tesla is currently valued $578 billion. Is Tesla overvalued? Probably… here’s how much their competitors are worth:
- Toyota: $211 billion
- Volkswagen: $84 billion
- Mercedes Daimler: $71 billion
- General Motors: $60 billion
- BMW: $55 billion
- Honda: $50 billion
- Ford: $35 billion
- Hyundai: $20 billion
- Nissan: $20 billion
- Kia: $12 billion
It appears the expansion of the monetary supply is driving inflation in equity prices. The low yields on safer investments are also driving people towards stocks. This doesn’t mean that we’re due for another correction, but corporate insiders aren’t so sure. As these insiders have information not available to the average investor, they have a far better track record of buying near a market bottom and then selling near a top. An analyst’s review of these traders are bearish right now. Recent history has shown that a correction occurred within 2-6 months of this.
Just because insiders aren’t buying right now does not mean the market is poised for major declines. There have been a lot of indicators over the last few years that pushed a bearish narrative. What is different this time is how a new administration may approach these concerns. Spin has been able to sweep a lot under the rug. I doubt President Biden will distract investors in the same manner.
The eventual end of the pandemic may mitigate this, so investors need to remain cautiously in the market. Diversification is also key in times like these, though some of the earlier tactical reallocations I made this year helped. The addition of the Invesco QQQ Trust ETF (QQQ) helped take advantage of the growth in that sector. The other moves made in 2020 were the addition of gold holdings and an increase of cash positions. These trades proved to be prudent moves for the duration of the pandemic.
The Value sector remains high on the top of many analysts minds for 2021. The pandemic pushed a lot of investors towards the growth sector’s technology holdings. While the ‘stay at home economy’ stocks may flourish for some time, there is always a reversion to the mean. As most of us are invested for long time horizons, this undervalued sector still offers a lot of potential while providing more stability.
Come January, I will begin to review client account performance, investment allocations, and the track records of the individual funds. Changes to fund selections as well as client portfolios will follow from there. Considering the continued warning signs, portfolios will most likely remain defensively positioned until mid-2021.
Year End Planning
For clients holding funds in retirement accounts, a conversion to a Roth IRA may be prudent. A conversion from a traditional IRA to a Roth IRA is a taxable event that offers long term tax savings. It may make sense for some clients to convert now rather than to wait for higher rates in the future given the historically low tax rates. While I have reached out to those clients who would benefit the most from a Roth conversion, please reach out to me if you would like to explore this option. As the deadline for doing this is December 31st, please let me know if you’d like to discuss this further as soon as possible.
Another tax planning item to consider is capital gain / loss harvesting in taxable brokerage accounts. This is done by selling securities with a gain and then offsetting those gains by selling funds at a loss. For accounts with managed portfolios, this was done earlier in the month. If you are managing your own portfolios, take some time to review your accounts and reach out with any questions.
One word of caution while harvesting gains is that you need to avoid Wash Sale Rule. Basically, this means that if you sell a security, you want to avoid purchasing the same security again within a 30 day period. If you do repurchase a substantially equal security, you run the risk of disallowing the use of losses for tax purposes. Of course, there may be a reason to ignore this rule. An example of this was when the pandemic first impacted the stock market this year. An example of that would be the repurchase of securities after a substantial market decline’s bottom. When the pandemic hit earlier this year, the sudden rebound meant that it was more beneficial for clients to return into the market at a lower price than waiting to repurchase investments.
Outside of these year end items, investors should remain cautious until the new year. If you have any questions or concerns, feel free to reach out to me. If not, please enjoy some much needed rest and relaxation over the holidays. We all deserve it!