BCA Weekly Commentary 1/29/21: Entering A Lost Decade?
SUMMARY. We continue to weigh the net benefit to short term growth on massive fiscal spending and covid-19 waning against what we deem high speculation on relatively high expectations for growth. The speculative aspect became front and center in markets this week with several stocks and continues to be reminiscent of speculative behavior in bubble of 1999/2000. Economic growth expectations remain HIGH as even the Fed's Kaplan, a governor, indicated to expect 4.5-5% growth in 2021. Many of these forecasts may not fully factor the political discord that exists and the negative effects on small business in regards to taxes/regulation. What we are focused on is not the "sugar rush" creating by over spending by gov't, but what is beyond that temporary period AS THAT WILL MAYBE THE GREATEST DETERMINANT OF MARKET VALUATIONS. We are growing more concerned with tax increases & already mountains of regulations via executive orders and that a "lost decade" of growth is to come. This occurred in Japan in 1990's as both structural issues in the economy and maturity caused long periods of very slow growth. Growth fueled by debt by govt tends to create short term not long-term growth and MAY even cause SLOWER long-term growth especially in light of extreme debt levels world-wide. THE POINT IS PERIODS OF EXCESS MAY LEAD TO PERIODS OF CONSTRAINT WITH LITTLE OR NO GROWTH and that is our fear. As a reminder that is what occurred under OBAMA which had similar leadership/polices, lower debt levels overall and lower taxes as we exited the 2009 financial crisis. That latter two points argue for even slower growth.
INVESTMENT IMPACT. As the speculation rose to extreme levels by individual investors, we have moved into even creator conservatism this week. Cash/bond levels in our growth models are well over 30% the highest since late 2019 and fall 2018 before markets corrected 20%. Net net we continue to hold VERY high cash levels and maintain more of a defensive posture at this point with high exposure to dividend paying utilities and gold stocks. Deploying cash will depend on opportunities that arise and economic growth progress. As risks rise so will the threshold of weighing the risk/reward of model additions. Dividend yields will be increasingly important for those additions.
Our model portfolio performance has been updated on our website as of 1/31/21.
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