The more things change, the more they remain the same. Despite the pandemic, this can even be said for 2020, even though it was a year like no other. This is what we wrote in this letter exactly one year ago: “The new decade will provide opportunities to both buy into weakness and sell into strength. We expect the extremes this decade to change over shorter time intervals than what investors experienced over the prior two decades.” We expect more volatility in 2021, albeit less dramatic, as investors deal with rising inflation, interest rates, and higher taxes. It is amazing how different the world is today compared to 12 months ago. In many ways the past year has forever altered the way we will do business, both domestically and internationally. We have stated in local and national media interviews that the pandemic has significantly accelerated the trends we were already seeing toward online business at the expense of brick and mortar. The pandemic has done more than that, however, as some of our daily routines will become distant memories for generations to come. Despite these material changes, and as we head toward a second wave in much of the world, Alan B. Lancz and Associates, Inc. currently has a similar outlook to what we expected at this time last year. Going into 2020 we expected stocks to rise early into the year and recommended partial profit taking (reducing risk) as valuations rose. News of COVID-19 in late January pushed us to sell more stocks, especially as they hit all time highs through most of February.
The same thing is occurring at the start of 2021.
After a phenomenal surge in November and December on post-election vaccine progress, markets are poised for further record valuations on expectations of massive stimulus. In addition, earnings comparisons will be much easier to beat versus last year’s lock down forced dismal numbers. However, just like last year we expect bouts of weakness into the new year that will create better buying opportunities versus chasing stocks from record valuations. The potential upside will definitely not be as dramatic as what we experienced from the depths in March and April last year. Even more so than last year, risk management will be a critical component for long-term success. As illustrated with the pandemic, the likes of which we have not seen in over 100 years, the discipline to buy into panic selling remains at the forefront of investment success. After a rebound beyond anyone’s expectation, it is just as prudent to start locking in partial gains in those high flying momentum positions into this strength.
Today is quite different from when we warned in the summer of 2007 of excess valuations in foreign as well as domestic stocks and global real estate. There are still solid long-term buying opportunities (highlighted in the following pages) that have yet to participate in this bull market. It is always easier when segments of the market have not performed because such low expectation opportunities allow investors to participate in this market without taking the inherent risk into a long-term bullish environment. Investors need to take advantage of the volatility into 2021, just like in 2020. Those that have the resolve and discipline to selectively participate will be well rewarded. Typical 60:40 (stock to bond allocations) will lose importance with the unintended consequences that will be created over the next several years. Investors need to position their portfolios now before the affects become apparent from the likely upcoming excessive stimulus. Passive investing, long-term bonds and even most target date funds will disappoint as investors need to prepare for inflation by accumulating real assets into weakness. Considering the current historically low interest rate environment, many fixed paper assets will clearly disappoint.