The 2020s are here — but will they roar?
The stock market excitement seen over the first quarter of this year could be a harbinger of what to expect on an exponentially larger scale over the next five to 10 years. The coming years may bring a fair dose of volatility, but we can see these ‘20s playing out a lot like the Roaring ’20s of a century ago. That decade, as we all know, came with alluring excitement on the way up, and then a devastating ride down.
Shepherding clients safely and successfully through such periods poses a specific challenge; such periods present very different risks than those we have become practiced at managing over the past 20 years.
Leading into last year, pre-pandemic, we had been through a decade-long, slow slog back from the Great Recession. In that period we added about 200,000 jobs per month to the U.S. economy, culminating in all-time high employment levels and stock markets that climbed steadily higher. Consumer and corporate balance sheets were healthy and 2020 kicked off with some predicting (ourselves included) that we were on the cusp of a 21st century Jazz Age.
As we all know, fate, in the form of the coronavirus pandemic, had other plans and that year presented investors with a slew of unexpected challenges and unforeseen events. But we believe this century’s Roaring ’20s was postponed, but not canceled.
For the next several years — maybe the better part of a decade — opportunity risk may present a far greater threat than downside risk. Advisors will need to make choices about how best to participate in the markets. Standing on the sidelines waiting for a crash could become an increasingly unpalatable option for both advisors and clients. Attempting to time the market cycle will offer its own pitfalls.
So what to do? The key will be building portfolios of quality holdings at attractive valuations that are positioned to surprise to the upside or that could become exciting — a feat that requires sophistication and expertise. We are headed for perilous waters but those that emerge on the other side of this market cycle stronger for it will be well-positioned for the excitement ahead.
Stage set for exuberance
At the beginning of the 2021, for the first time in quite a while, we saw individual investors and the news media alike transfixed by the performance of individual stocks. GameStop, with a fairly modest $25 billion market cap, appeared repeatedly on the front pages of The New York Times and The Wall Street Journal. We saw a similar burst of excitement several years ago with the runup in cryptocurrencies and marijuana stocks. But these were small ripples, maybe preambles, to major periods of exuberance.
It is also worth considering the life span of previous market cycles. A broad view of the period from 1978 to 2000 shows the global economy going from deep malaise to a feverish top, following a similar trajectory in the period covering the middle of World War II to 1968. While each secular bull market has its own idiosyncratic nuances, the long view shows they tend to follow the same general path from plumbing the depths of a woeful bottom to reaching a heady peak.
This is not to suggest there won’t be some jarring bumps along the way. It is hard to ignore some of the potential headwinds that could quickly go from stiff breeze to gale-force market killers. Although we do not think inflationary pressures will derail this market, it certainly bears watching as does a weakening dollar and the ever-present threat of another deadly go-round with COVID-19.
And yet the factors that had so many predicting go-go growth over a year ago are still very much in place. The job market, after taking a huge hit from the lockdowns, is recovering as increased employment leads to increased spending and to increased investment. Uncle Sam’s willingness to cut checks to those who need them (as well as many who did not) certainly helped. Look no further than the housing market to see how this could easily transfer to the broader stock market.
Consider too that exuberant economic times are often driven by transformative new technologies. A century ago, the automobile was the catalyst that radically changed America’s socioeconomic outlook and trajectory. Today, Biotech companies like Gilead and Amgen have licked Hep C and now have the Big C — cancer — in their sights. The smart phone achieved ubiquity barely 15 ago and 5G is just being rolled out. Artificial intelligence and blockchain are still in their infancy just as IP protocol was in 1992. The possibilities are seemingly limitless and within grasp.
Perilous peak
That’s the good news. The challenge, in our view, is that it is far more difficult and risky investing in prosperous times than in tough economic periods. At the market top, the highest returns are being earned by foolhardy investors. They may be lemmings approaching a cliff, but until they go over they have results on their side. For those not participating in the ride up, the temptation to jump in late in the cycle is tough to resist. That is how damage is done and fortunes are lost.
A better strategy is to be invested all along the way, paying particular attention to building diversified exposure to a wide array of groups and industries that may each attract a measure of investor adoration. Markets are inherently erratic and bumpy. Those who moved to the sidelines a little over a year ago as markets hit a pandemic-induced swoon did not participate in the sharp snapback in the months that followed.
If a new Roaring ’20s do play out, advisors will have to choose whether to participate or run the risk of missing out on what could be another 10 year move up. The second half of this bull market will be much trickier. You need to position client portfolios to have exposure to exciting names before they become exciting. You need to be agile and specific in your choices.
This is a great time for selective stock-picking. Then let your portfolio ride.