We expected volatility in the 2nd half of 2021, and it took until early September before investors experienced the pressure on the downside. This was similar to last year, when profit taking into summer record highs gave us an opportunity to buy into a significant sell-off in September/October. The catalyst behind the turnaround last year was obviously the news on the vaccines, but what is likely to set stocks to new all-time highs this time around? First, we do not see this as a 1999 or 2007 type of situation, at least not just yet. The catalyst might be more stimulus and the potential infrastructure deal. While this might be considered a catalyst for stocks, as opposed to the vaccines, the infrastructure bill is really a short-term shot in the arm. In fact, the larger the stimulus package is the more negative and “bubble like” the end result will eventually be for unsuspecting investors. That is one reason it is important to also have real assets, that are inflation hedged, as part of one’s portfolio. If this spending trend continues the S&P 500, and most stocks in general, should not be an over-concentrated part of your total assets.
Emerging markets are also exposed to the dramatic changes the Chinese Communist Party is making in the face of what used to be at least a pseudo capitalistic front. Investors should wait to buy until it is more clear how far the Communist Party will take this. In the interim, it is always good to gradually accumulate quality leaders into weakness. After all, that is the point of the earlier profit taking – to reduce risk at record valuations and selectively buy into panic selling.
Alan B. Lancz and Associates, Inc. is still finding solid long-term opportunities with the rotational corrections investors have experienced over the past year. It is critical to not only be selective but also to continue to be disciplined in both accumulating income producing assets as well as profit taking. We have been writing about inflation and the importance of owning real assets as an inflation hedge (assets paying out a growing stream of income). At the end of both 2019 and last year we recommended natural gas wells for specific clients seeking to diversify into real assets. At the time natural gas prices were $1.74 USD/MMBtu, and the past few weeks have surges to well over $6.00. Through short covering, hurricane disruptions, and international price spikes, we feel natural gas is ahead of itself from a pricing standpoint. We thought natural gas prices could advance to $5-6 USD/MMBtu by the latter half of the Biden administration. Prices have already surged beyond these levels and seem ahead of the fundamentals at this point.
It is still important to concentrate a portion of one’s net worth in real assets like energy but chasing at these heightened levels is typically not wise. Investors have felt the affects of chasing high flyers with the collapse of the once hot SPAC arena, then the IPO craze that cratered and of late the mega-tech names have all fallen, at least temporarily, from grace.
