“Hit the road, Jack! And don’t you come back. No more, no more, no more, no more! Hit the road, Jack. And don’t you come back no more” …! (1)
Ray Charles recorded this song in 1961 and I believe this song reflects how most everyone feels about our last year, 2020. Before I discuss investment strategies in 2021, let us look back at the years 2019 and 2020…
The year 2019 was an easy year to be an investor and It was an even easier year to be an investment advisor! The tide was coming in. The wind was at our back. The fish were really biting – It was hard not to have great investment returns.
And, well, 2020 was a whole lot of different. Not only were the fish not biting, but the tide was also going out and we had a category five hurricane that was blowing at us, that came out of nowhere! I find it hard to believe that many people did not have a few, if not many, sleepless nights in 2020 worrying about themselves, their family, and their loved ones.
From an investment advisor’s perspective, it once again proved to me that you better have and utilize a rules-based investing plan.
Last year’s headlines between the pandemic, the election, and the economy, I had some perspective investors that told me they were sitting there in cash or running for cover. 2020 was not as quite as good as 2019, but still in my book gave a solid investment return. Anytime you can get close to a double-digit return it is a win. If you can get that kind of return while it seemed like your very way of life was going to be changed forever – Then it’s a double win! If nothing else went right for you in 2002, at least the market performed.
I first started using an investment process called Tactical Asset Allocation Using Relative Strength in the year 2000. That year signified what I believe was the end of the buy and hold strategy. It was also the start of another bad Bear market that ran for a couple, two or three years. Most investing strategies work well in Bull markets, but it is even more important to investors, how do they perform in Bear markets? We have had several Bear markets in 2000-2002, 2008-2009, and then we just went through a short-term bear market February through April of 2020.
HOW DOES THIS STRATEGY WORK?
I think the easiest example to use is a professional Football coach. When you watch these coaches from the sidelines, you know to them it is not just a game, right? The game means more to the coaches than the rest of us, yes. You don’t want to see your team lose, and it is just a game, but as soon as the game is over, you’ve probably gone onto something else. While you are watching these coaches on the sidelines, you think their head is going to blow off their shoulders! You look at their faces and you know that their blood pressure is way up. It’s obvious that the game is very important to them. It is not just about the money and they want to win. In professional football, there are probably three or four different quarterbacks that are all vying for the number one position. Your job as a coach is to put the best player on the field. Well,
specifically, the NFL calls this an efficiency rating. This efficiency rating is broken down by performance on the field, touchdowns, completions, interceptions, games won, games lost, etc., and they assign each player an efficiency rating. The higher the ranking in the world of football, this is a better player than somebody else with less of a ranking. It makes sense. Put your strongest player on the field, not just at the quarterback position, but at all positions.
IN THE MARKETS NO EFFICIENCY RATING, BUT PERFORMANCE MATTERS
There are about 100 plus sectors that you could allocate money to whether it’s transportation, retail, health care companies, financial companies, energy companies, you get the picture. But we have even a much better rating than the efficiency rating. It is a performance rating. Now, the performance rating of not only the whole market but each sector is done on a daily, weekly, monthly, annual performance. So, it is very simple to see which sectors are outperforming now. For example, if the transportation sector has gone up 10 or 12 percent in the last three months and the entertainment sector has dropped 30 percent, there is no question in anybody’s mind which sector is stronger, right?
My job as an investment advisor is to allocate money in stronger versus weaker sectors. Now my job is not to predict which sector I think is going to do better. My job is not to predict who is going to win the election. My job is not to listen to the media that tells me this or that. My job is not to listen to economic forecasts. My job is to focus on which sectors are the strongest and rotate my clients into those. What I tell my clients, I certainly do not know where we’re going to be in six months, but I will tell you where the right place to be is today. If the sectors change, we are going to change with it. (Of course, you must weigh the tax consequences of any investment decisions.)
Frequently, I get a question of how long can these sectors keep outperforming? I have seen some sectors outperform for 10 years, some sectors just for 3 or 4 months. Just think for a minute of some of the high-flying companies today. Whether it is Amazon, Microsoft, Tesla, or Apple – how many years have these companies been outperforming?
JANUARY 2021 FORECAST – (Drumbeat – dum, dum, dum, dum, dum, dum, dum, dum.)
Here’s what you have been waiting for. So, what is John’s forecast for 2021? I am only going to give you a forecast for right now. Unfortunately, while there are still millions of people who are not doing well in America, I think unemployment is at 6.7 percent, something like that. The reality is springtime is coming. The vaccine is here. Yes, the rollout is going to be difficult, but that is just like anything that you try to do in masses.
THE GOOD NEWS
I look around and the housing market is smoking. The international markets have finally come alive in the last two, three, four months. I have not seen this trend in many years. The big industrial companies are operating, not quite at capacity, but ramping up. And now, here come hundreds of billions of dollars in more stimulus money. Household net worth rose 3.2 percent in the third quarter to $123.52 trillion, as stock portfolios and real estate prospered (3). The Institute for Supply Management said its manufacturing index rose to 60.7% in December from 57.5% in the prior month, marking the highest level in almost two
and a half years. Manufacturers have expanded for seven months in a row since the economy reopened last spring (2). Even more importantly, there is a tremendous pin-up demand for people to spend money. If you are retired, I bet there are a lot of trips, excursions, and outings that you canceled in 2020 that you are just sitting there saying, boy, as the pandemic recedes, I am going to be making it up this year.
WELL, OKAY. WHAT ARE THE TOP SECTORS? I THOUGHT YOU WOULD NEVER ASK…
Some of these sectors have been performing exceedingly well over the last five, six, seven, eight months. Technology companies, housing companies, big-box retailers, work at home software, cybersecurity. We are now seeing the market broaden out. Small to mid-cap companies are outperforming. Emerging markets, international small caps. We are even seeing commodity prices move up, if not to an all-time high. I believe lumber right now is trading up to the highest level it has seen in decades. The price of copper is going up. Even oil has moved up from its historical lows.
But even more importantly, I sincerely hope that you take care of yourself and your loved ones until we can get to the spring, and hopefully put the brunt of this awful pandemic behind us.
Sincerely, John Romano, CFP®
Office Phone Number: 352-753-8590
John Romano, CERTIFIED FINANCIAL PLANNER™, has over 30 years’ experience in the financial field. John is a Registered Representative with Securities America, Inc. (a member of the FINRA and SIPC), and an Investment Advisor Representative with Securities America Advisors. He has prepared hundreds of reports for retirees to assist in their retirement income planning needs. He is dedicated to providing portfolio analysis, dividend and income information, and investment management services to retirees (and those preparing to retire) in The Villages, Florida, and throughout the United States.
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