Monthly Outlook: April 2021
It’s finally springtime in the Rockies and that means excitement for warmer and longer days, new growth, and transition from skis to bikes. Likewise, markets are volatile with transition from growth to value and rising interest rates to accompany the recovering economy. It’s only natural, then, that investors are coming out of their pandemic lock-down mode and wondering what the “new normal” will mean for them. Luckily, we have decades of history of economic and market cycles to learn from and have a pretty good idea what investors should do and not do. Below, we discuss three common mistakes that investors make at turning points.
For the past two years, Big Tech stocks like Facebook, Apple, and Google have led markets higher and vastly outperformed other sectors. Some astute, or maybe lucky, investors piled into technology stocks and had big returns in 2019 and 2020. Yet, the technology sector is just one of ten sectors in the market. We saw a similar dominance by technology in 1999 and 2000 and that didn’t end well in 2001. Today, some investors are tempted to continue chasing these names because we tend to extrapolate the recent past into the near future. Yet, evidence from history strongly suggests that technology is unlikely to be the winning sector in 2021. Perhaps you’ve seen the sector performance quilts that look like a periodic chart? (Try callan.com). We can easily measure which sectors are performing best and, already in 2021, we clearly see a rotation from “growth” to “value,” a rotation from technology to financials, energy, and industrials. That’s not a guess, that’s a fact. Similarly, investors may be tempted to move to the best performing manager or mutual fund from last year. That, too, is not a good idea based on history. Standard & Poor’s updates an annual study of active fund managers that proves that 1) 92% don’t beat their benchmark and 2) those that do are rarely the ones that beat it the following year. The lessons from history are that it’s best to diversify your portfolio with different asset classes (US Large, US Small, International, etc.), tilt a little toward the better performing sectors and asset classes, and stick to a strategy that is likely to produce consistent gains and limited downside. That’s how you get and stay rich.
The Market is Not the Economy
If you really listen to Bloomberg or CNBC TV and their endless hours of investment speak, they mostly talk about the economy. Every pundit offers their guess about jobs, inflation, GDP, earnings, spending, taxes, and so on. But to make money investing, you don’t need to be an economist. You need to focus on the markets directly. Just look at 2020 and the COVID pandemic. The economy fell apart yet the S&P500 is 16% higher than it was pre-pandemic. How can that be? It’s because investing is based on what you think about next year’s economy or, better yet, what others think you might think about the economy. Trying to game this psychological doublespeak is why predicting markets is nearly impossible. It’s easier to predict the economy since it’s slow moving. Investors would be better off analyzing what the markets are doing and investing, accordingly. Today, we all believe the economy will continue to re-open as the pandemic wanes. And that’s a great thing. But the market may have already priced in much of that expectation. Could 2021 bring a better economy but a market correction? Maybe. The point is to watch the markets, not the economy.
Avoid the Big Loss
This last point is timeless but is especially appropriate today. Stocks have had a great recovery from the pandemic low of March 2020. In fact, they’ve had a great run since the 2009. While it’s absolutely possible and likely that markets continue higher into this post-pandemic excitement, we should be mindful that valuations are at 100-year high levels. That just means that if any unexpected catalyst comes along to spook investors, there is the potential for a significant correction. Right now is a prudent time to ensure that you (or your money manager) have a definite downside protection strategy in place. Sell stops and a rule for using it is a good place to start. If you avoid these three mistakes, you’ll successfully grow and protect your portfolio and sleep well while doing it. No fooling.