January 14, 2021
2020 was a year of loss, upheaval, and adaptation with few parallels in recent history. For investors, it was a year of radical uncertainty and extreme volatility, including the steepest market decline and the swiftest recovery ever, a global economic shutdown, and monetary and fiscal stimulus programs that dwarfed all precedents. In the US, we lost 22 million jobs and regained 12 million, impeached one president, elected his successor, and marched by the millions to protest racism and police violence.
For all the turmoil and tragedy, 2020 was also a textbook case for the investment principles that guide our practice: stay diversified, take advantage of market downturns to rebalance, make sure your portfolio matches your long-term financial goals and risk tolerance, and don’t let emotion guide your decisions. When the pandemic began, few believed that we would have a vaccine by year-end. Fewer still imagined that global stocks would end the year up over 15%. Overall, we emerge from this extraordinarily challenging time with strong investment gains and enhanced humility regarding the futility of trying to predict what the future will bring or how markets will respond.
As we enter the new year, some of the most significant uncertainties that loomed over the world in 2020 are beginning to resolve: when a vaccine will be available, who will win the US election, whether Britain will face a “hard Brexit.” On balance, we look forward to a year of recovery and healing: The incoming Biden administration is likely to adopt more predictable policies on a host of issues from trade to military alliances to regulation and global warming. Democratic control of the Senate and the House likely means more generous stimulus checks and aid to state and local governments. As the pandemic subsides, global manufacturing and trade are likely to pick up, fueled by pent-up demand and boosted by ongoing economic stimulus. Unemployment should continue to fall, and corporate profits could soon be back to pre-COVID levels.
How are financial markets positioned? The top ten mega-cap growth leaders that benefit from the digital transformation of the economy and fueled last year’s gains now account for a record 29% of the S&P 500 market value. While the general background should support investors, stock valuations are well above historical averages, and bond prices are close to all-time highs. Such a climate suggests a heightened vulnerability should investor expectations be disappointed or unanticipated crises arise.
However, not all sectors have benefited from recent gains, and opportunities lie in these discrepancies. The difference in valuations of growth stocks (tech, consumer discretionary, communication) compared to value (financials, industrials, materials) is at its widest in twenty years. Small cyclical stocks are particularly underpriced. International markets are at their lowest multiples vs. the US in two decades. These sectors share a higher level of sensitivity to economic conditions and should outperform in the global recovery. We expect to benefit from their resurgence.
Bond investors face the challenge of near-zero interest rates. Still, the role of high-quality bonds as stabilizers in a portfolio during times of stress remains as essential as ever. In the current environment, we favor actively managed bond funds that can invest opportunistically, and we have kept average bond maturities low to protect against the possibility of rising inflation.
Environmental sustainability issues, corporate governance, and social justice (aka “ESG”) were prominent in 2020. Fossil fuel prices collapsed as economic activity ground to a standstill. Renewable energy technologies flourished. Global temperatures rose and wildfires raged. Our ESG funds generally outperformed their conventional counterparts, helped by minimal exposure to oil, gas, and coal, as well as an emphasis on sound management practices and technological innovation. We’re happy to report that we continue to find new opportunities in socially responsible investments, especially in historically underserved fixed income markets.
2020 was a productive year for LongView. It was a scramble to meet the challenges of working remotely, but we quickly adapted and found some advantages in meeting clients by Zoom. We sorely miss seeing clients in person and still haven’t been able to welcome most of you to our new offices at 136 Grant Avenue, but we will host our long-delayed housewarming party when it’s safe to do so.
We’re very excited to introduce our newest team member, Magalli Gomez, who will start on January 19th as Client Services Associate, working with Maria. Magalli spent eight years in the finance departments of Santa Fe Community College and Santa Fe University of Art and Design. Prior to that, she was Business Manager at an online bicycle retailer in Los Angeles for ten years. Originally from Costa Rica, she earned a bachelor's degree in hotel management and hospitality. Magalli is an accomplished ceramicist (https://www.magarte.net/) and enjoys camping and the outdoors. She looks forward to meeting you, and we have no doubt you’ll be as impressed with her as we are.
In addition to this hard copy, we’ve posted your year-end report to your secure client portal. Many clients welcomed our move earlier this year to increase sustainability through digitizing our reporting process, but some of you have expressed a preference for receiving reports by mail. We want to make sure we accommodate you in this regard. We currently post quarterly reports to your portal and in addition send the year-end packet by mail. If you have a different preference and haven’t already let us know, please reach out to Maria. If you need help setting up your portal, or would like a refresher on how to use it, Maria will be happy to assist you.
We deeply appreciate your trust and send you our heartfelt wishes for peace, good health, and well-being in this new year.
David, Harlan, Doug & Maria