January Commentary

In January, our net weighted average return in was +1.63%. Our net average return for the month by strategy:

  • Conservative: +0.07%;
  • Balanced: +0.45%
  • Aggressive: +4.48%.

Since 2015, we have generated a net weighted average return of +56.92%.

Framing Markets

A common feeling over the past year, and especially the past few months as lockdowns have dragged on, has been one of exasperation.

The monotony of living under restrictions coupled with the cold and dark of winter has often made one day indiscernible from the last.

The promise of vaccines has faded and been replaced with frustration over the pace of vaccinations and concerns about their efficacy against new variants.

People are bored. People are anxious. People are frustrated.

Which makes it difficult reconcile the fact that financial markets continue to make reach highs. Or not be concerned with the flurry of activity in areas of the market that has a growing number of people thinking, “Bubble!”

Despite sharing in some of these concerns, we remain optimistic.

The fact of the matter remains that markets are a forward-looking mechanism, and market participants are increasingly looking ahead to a reopening of the global economy in the not too distant future.

Financial markets like certainty and it is becoming increasingly certain that the vaccines, even if not as effective in preventing infection from the more virulent strains, are effective in limiting serious sickness. As the logistics of manufacturing, distributing and administering the vaccines improve, the pace of vaccinations will markedly increase. Once those most at risk are vaccinated, restrictions will begin to be lifted.

And as that happens, significant pent-up demand is going to be unleashed, with all indicators pointing towards a strong rebound in growth. At the same time as fiscal and monetary stimuli will continue to work their way through the economy.

For the US and Europe, much of that stimulus has yet to be disbursed. President Joe Biden’s first order of business upon taking office was presenting Congress with his proposal to “act big” and spend an additional $1.9 trillion of fiscal stimulus that has the potential to push the US economy – already on course for a strong recovery – to an even higher level of growth.

In Europe, the €750 billion recovery fund approved last year will start to be distributed in the coming months, helping stimulate economic growth as Europe emerges from the difficult lockdowns of this winter.

All the while, central banks from the ECB to the Fed are adamant in their messaging that monetary policy will remain accommodative. This combined narrative is a signal that we are moving away from an over-reliance on monetary policy that characterized the past decade of weak recovery and inability to meet inflation targets. We are entering a world of loose monetary and fiscal policy, in which economies and markets will be allowed to run hot, creating a dynamic of easy money, strong growth and rising inflation.

Moderate inflation is typically a good thing, and any inflation stemming from a return to normal life would be a welcome sign that the global economy is slowly dragging itself out of the pandemic-induced slump. And after the past 12 years of over-reliance on monetary policy that only inflated the value of financial assets, flat-lined economic growth and widened inequality, inflation in the real economy will be welcomed.

Framed in this context, it is no surprise that financial markets reflect an overwhelmingly positive outlook for the future.

That does not mean that there is no reason for caution.

For one, the current amount of activity in the market is concerning, particularly when it comes to people trading options.

While there is nothing inherently bad with market participation, the fact that that brokerage services like Robinhood have provided a millions of new “investors” with the ability to trade options with no previous experience is likely to end badly. And it is not only retail investors that are participating in this mania, as professional investors are also participating and taking higher than normal risk. One of the biggest question marks is what happens when restrictions are lifted and people can spend money on real goods, instead of speculating in markets.

Looking further out, while moderate inflation is a tailwind for equities, at a certain point it becomes a detriment. What that point is nobody knows for sure, and once inflation starts running away, it is very difficult to get under control.

In that case, central banks may find themselves in a difficult situation. While raising rates would combat inflation, it would also risk stopping the economic recovery in its tracks. Given their current accommodative stance, it is more likely than not that inflation will be allowed to run, but low interest rates could encourage even more risky behavior and increase overall indebtedness.

However, this dynamic is likely still far from playing from playing out. While the rising optimism and heavy positioning in equities has increased concerns of a correction, we ultimately believe that we are currently in the early stages of a bull market that will be driven by growth in the real economy, and remain positioned as such.