January 2021 Newsletter
The Market – Focused on the Future
As 2020 comes to a close there is much to look back and reflect upon. The year was filled with unprecedented events that are not likely to occur again in our lifetime. 2020 also provided some excellent lessons regarding flexibility, staying invested, and the logic of the market.
A year ago, we looked out to the New Year with hope, noting while there were some tremors in the economy, in aggregate things still appeared healthy. In fact, we wrote in our annual Outlook Report that “the risk of a recession in the next twelve months seems to us lower than it did a year ago, a belief also held by a plurality of economists in a recent Wall Street Journal survey.” Instead, we faced one of the worst recessions in modern history. As events unfolded at the start of the pandemic, PAM’s Analysts did not hold dogmatically to that initial outlook for the economy; rather, we were flexible in adjusting to the data and facts. This allowed us to make certain decisions early in the process, reallocating capital and selling certain positions. While sometimes painful, these early decisions allowed us to avoid the accumulation of further losses and to be situated to ride out the economic storm.
The year also provided an excellent example as to why it is so important to stay invested, even when things appear bleak. None of us believes we can time the market, but when troubling events start to unfold there is an alluring idea that we should move to cash and jump back in when things start to get better. Unfortunately, time and time again we have seen investors move to cash, only to fail to reinvest as things start to improve. This year was a perfect example of this scenario: numerous individuals asked if they should go to cash and invest after the pandemic abates. Should they have done this, they would likely have sold close to the market’s lowest point and still be waiting for the pandemic numbers to improve; missing out on the tremendous recovery that has occurred in the market. So, while we believe that we need to be flexible in our investment positioning, we need to be somewhat rigid in staying invested and focusing on our long-term financial goals.
Finally, the year has also given us a clear example as to the forward-looking nature of the market, which may provide some insights for 2021. In evaluating an investment, analysts look at the future cash flows available to an investor and discount these back to a present value. The pandemic caused a severe near-term disruption to cash flows that was broad based in nature. However, the longer-term impact is less uniform. As an example, up to the start of last year, there had been a steady move to ecommerce from traditional retail. The pandemic appears to have accelerated the transition by almost 10 years and, while an economic reopening might result in some give back, we suspect the dominance of e-commerce will remain. The long-term disruption likely means a relative increase in the future cash flow of e-commerce companies and a reduction in the estimated cash flow associated with traditional retailing. All things being equal, this increased the value of ecommerce companies and reduce the value of traditional retailing, which was reflected by their stock performance. This type of reallocation of capital toward those that will benefit from the new post-pandemic “normal” and away from those negatively impacted was occurring throughout the market, creating a wide divergence between the winners and losers. Furthermore – and more broadly -- the dramatic decline in interest rates lowered the discount rate applied to future cash flows, thus increasing their present value. This produced an upward bias to most equity indexes. So, while it might appear the market is out of step with the economy, this is not really the case. It is more the fact that the market is a discounting mechanism that focuses on the future.
In closing, I would restate and emphasize that the market is a discounting mechanism that focuses on the future. Taken at face value, the fact that markets are at all-time highs appears to indicate things are improving and we should hold out hope for 2021 (as for 2020 … I am done with it). Wishing you and yours a very safe and healthy New Year.
Coronavirus Stimulus Information
The Coronavirus Response and Relief Supplemental Appropriations Act was signed into law on December 27, 2020. The relief package includes a second round of stimulus payments of up to $600 for eligible individuals or $1,200 for joint taxpayers. No action is required for eligible taxpayers to receive the payments. More information from the IRS is available here.
Operations Corner
Account Review & Updates
If you have had any major life changes such as a marriage, birth of a child, purchase of a new home or a change of employment--it might be a good time to meet with your Portfolio Manager to update your investment objectives.
If you need to make changes to your contact information, or review or change your IRA beneficiaries please contact our Operations Department.
IRS Forms from Charles Schwab
Charles Schwab will mail out Form 1099R’s detailing your 2020 IRA Distributions by the end of January, and Form 1099’s for non-retirement accounts by the end of February. If you have chosen to receive your tax documents online, they will be available when you log in during the same time frames.
IRA Required Minimum Distribution (RMD)
If you are 72 years old or older and have a retirement account that we manage, you will be receiving information from Private Asset Management, Inc. shortly regarding your 2021 RMD. Please watch for this & contact us to make the necessary arrangements to satisfy your distribution.
IRA Contributions
The deadline for 2020 IRA contributions is April 15, 2021. Contributions must be received in our office by Thursday, April 12, 2021 to ensure a timely deposit. Please indicate the tax year in the memo field of your check. The contribution limit for 2020 contributions is $6,000, or $7,000 if you are over age 50.
Endorsing Checks for Deposit at Schwab
All checks for deposit must be made payable either to the name on your account or to “Charles Schwab.” Checks payable to the name on your account must be endorsed. We suggest writing "For deposit only" and then signing below that. For checks from a title or insurance company, the endorsement and the signature(s) must match the listed payee(s) exactly or they will be rejected.