Quarterly Investment Commentary

20-20 Vision

Just when it seemed that 2020 could not get more unhinged, the president contracted Covid-19 along with a number of key advisors and Republican lawmakers.

Vision test

It’s been quite a year so far between the global pandemic, global recession, fires raging on the West Coast, hurricanes on the East Coast, and a political circus in Washington unlike anything we have ever seen. With the pandemic still spreading, the president in recovery, and the election less than a month away, it still feels that we have a long way to go.

Moreover, the media is full of speculation about every possible outcome of every situation, absent any context of probability, only adding to stress and the fog of uncertainty. Just because something could happen, doesn’t mean that it is likely to happen.

Take a deep breath

We have no more insight than any of the many experts about how things will play out in the near-term. But we do know that we will ultimately get through the election and Covid, and that things will eventually return to normal.

It is important to keep that in mind especially in thinking about investing. While we are keenly aware of the limitations of our predictive powers, there are several guiding rules that help keep us sane, grounded and focused on the future:

  1. Your greatest fears and hopes don’t typically come to pass.
  2. Don’t mix politics and investing.
  3. In the near term, the stock market will tend to do the opposite of what most people expect. Over the long-term, it will rise.

We have found these rules to be particularly helpful this year.

With respect to the election, there are two likely outcomes: that it is a close election and results are contested in the courts; or that it is an unambiguous win for Joe Biden and he wins enough votes in key states to make the electoral math unassailable. The president has done all he can to question the legitimacy of mail-in voting and sow seeds of mistrust in the results. The media has likewise become obsessed with how a contested election could play out in the courts. But the most recent polling data suggests that Biden has a significant lead over Trump, and this was before the president and a number of key staff members contracted Covid after repeatedly disregarding recommended safety protocols.

So, while it is possible that the president could win reelection outright or through a messy court battle that takes weeks or months to resolve, the more probable outcome is that there will be a clear winner sooner than later, and that the winner will be Joe Biden. Current polling data also suggests that the Democrats will also gain control of the Senate. Our investment strategy does not assume that one side or another will win; only that the election will ultimately resolve itself and life will move on.

This brings us to rules 2 & 3

It rarely pays to mix politics and investing. The U.S. economy is a $20 trillion-dollar economy – in a $140 trillion global economy - comprised of millions of businesses and organizations, and hundreds of millions of employees, customers and participants. It is far larger and more dynamic and resilient than it might seem on television. It has a natural tendency towards growth and progress that is hard to hinder, no matter what party is running the show.

The conventional wisdom is that a Biden presidency and Democratic sweep of the House and Senate will result in higher taxes which will be bad for business and the stock market. While Democrats would almost certainly raise taxes for corporations and highly compensated individuals, most of these increases would only return taxes close to where they were before Trump became president. Economic growth was fine then and we suspect that the economy can handle higher taxes and still keep growing.

Meanwhile, a Biden Administration, backed by a Democratic Congress would likely launch a large infrastructure and economic aid program that would inject two to three trillion dollars of additional fiscal stimulus into the economy over the next four years. This would almost certainly bolster economic growth and employment.

If Biden wins the presidency but the Republicans retain control of the Senate, then it is less likely that there will be any tax increases or major new spending programs.

Conversely, if Trump wins reelection, taxes will remain low, but deficits will rise and there will continue to be a high level of uncertainty about global trade policy. There is also a level of capriciousness with the Trump administration’s approach to managing the economy that is more focused on politics than actual progress.

Much of this country’s growth post World-War II was driven by bold and unifying initiatives like the interstate highway system, the space program and the internet that placed infrastructure, science, technological innovation and global trade as central priorities. This progress was also facilitated by a close partnership between the public and private sector, as well as research universities. Today, much of our nations physical infrastructure is deteriorating, our K-12 educational system is faltering, and our healthcare system is highly dysfunctional. Meanwhile, climate change is starting to have a significant economic impact as millions of people are displaced by storms, fires, and floods. Regardless of who wins, our nation needs a forward-looking and unifying plan for the future if we are going to be able to compete in the 21st century.


The Covid pandemic will ultimately be tamed and life will return to normal. This will likely start to happen early next year. There are currently 11 different vaccine candidates in Phase 3 trials, two of which show particular promise. Once one or more vaccines are proven to be effective and are approved, it will take the better part of 2021 to deploy them throughout the world, but as the number of vaccinated people grows, the ability of the virus to spread should slow significantly.

In the meantime, it is also important to note that effective precautionary measures like social distancing, washing hands, wearing masks, rapid testing and contact tracing actually work, especially when combined with clear government policy and leadership. China, where the virus started, has substantially returned to normal. Infection rates in South Korea, Japan and Singapore are also extremely low. Even in Canada, we see substantially lower infection rates than here in the U.S. Among developed nations, the United States is a cautionary example of how not to deal with a pandemic. The virus, like Climate Change, is apolitical and no hoax. It is governed by science and math rather than partisan ideology. It is both poignant and sad that three world leaders who have most vehemently and recklessly dismissed the veracity and severity of the virus, Boris Johnson, Jair Bolsonaro of Brazil and President Trump, have all contracted Covid.

Investment Implications:

The most important implication for investors is to focus on the long-term and to try to look beyond all of the near-term uncertainty, as difficult as that may be. Nobody is certain how the election will pan out or when there will an effective vaccine to fight Covid, but both will eventually happen.

In addition, even if you think you know how something will pan out, be wary of consensus opinions. Investors have a habit of not only getting the outcome wrong, but also the outcome of the outcome. In 2016, it was assumed that if Trump won the election, the market would tank. It did for about 8 hours before rallying strongly for the next 14 months. Today, the prevailing wisdom is that a Biden victory will be bad for markets. We question this. There will likely be higher taxes but also more fiscal spending and a greater sense of stability.

It is important to keep in mind that the intrinsic value of assets in your portfolio is based largely on the cash flows (earnings and income) that these investments will produce over the next ten or twenty years and beyond: not the next 3-6 months. A short term hit to profits has little impact on a company’s long-term economic value as long as it can recover and grow its profits into the future.

What matters much more is the price that you pay today for the stream of cash flows that you will receive in the future.

This is a particularly important insight right now.

Investors often talk about “The Market,” - typically referring to the U.S. stock market - as if it is a monolithic thing. But “The Market” is actually a collection of many markets reflecting different asset classes, geographies, sectors and industries and types of companies.

Today, many broad-based asset classes are highly priced based on their long-term earnings potential and historical averages. This is broadly true for stocks, as well as bonds, and real estate.

But underneath the hood of the global stock market there are sizeable differences in the valuations and expected returns between economic regions, sectors and types of companies. In particular, the U.S. stock market is considerably more expensive than international and emerging stock markets, and within the U.S. market, some growth-oriented sectors like information technology are considerably more expensive than economically sensitive sectors like industrials, financials and energy. In addition, large companies tend to be more expensive than small companies.

The Covid crisis reminds us a little of the 1999-2000 period when the idea advanced that there was a “new economy” and an “old economy.” Companies that were seen as tied to the “new” internet-driven economy were bid up to absurd valuation levels regardless of their ability to ever earn enough money to justify the price. Conversely, companies that were seen as tied to the old “brick and mortar” economy were shunned and priced for extinction even if they had durable and profitable businesses. Then, the dot.com bubble burst and prices corrected.

Today, there is a similar idea of Covid-winning companies and Covid-losing companies. Investors have piled into the winners, (think companies like Apple, Amazon, Microsoft, Facebook, Alphabet, Netflix and Zoom) driving their valuations up to lofty levels. Likewise, they have shunned the perceived losers, allowing their valuations to fall to historically low levels.

Unlike the dot.com bubble, many of today’s Covid-winning companies are remarkably good businesses – well positioned, well capitalized and highly profitable. But they are still only worth so much and it is hard to get excited about current valuation levels. A lot of future growth is already baked into current prices and expected returns from here on out are low.

Conversely, many of today’s Covid-losing companies are perfectly good businesses that should come back to life as the economy starts to recover.

Our client portfolios have benefitted over the past few years from significant exposure to technology and healthcare stocks. This is especially true this year. But now these have become the sectors and stocks that everybody wants to own. Everybody is on one side of the boat, and there are currently more attractive opportunities elsewhere.

Consider that year-to-date, the Nasdaq 100 index, representing large growth-oriented companies is up almost 30% and the Russell 2000 value index (reflecting smaller and more economically sensitive companies) is down 20%, representing a 50% spread between the performance of the two in just over 9 months. Over a five year period (Chart 1), the Nasdaq 100 index has risen 180% versus 90% for the S&P 500 and only 25% for the Russell 2000 value index.

Chart 1

Historically, these indices typically track one another fairly closely and spreads of these magnitudes are aberrations that tend to correct themselves when a catalyst for change appears. An effective vaccine would certainly be such a catalyst.

Chart 1

Similarly, if we look at the U.S. market versus International and Emerging markets, year to date, the S&P 500 is up 5% while the MSCI EAFE index is down 7% and the MSCI Emerging Markets index is down 1%. Looking over a five year period (Chart 2), the S&P 500 is up 90%, International stocks are up 54% and Emerging Market stocks are up only 27%. Relative to the U.S., the rest of the world looks cheap, especially if global economic growth starts to rebound.

We have therefore been reducing exposure to these higher growth areas like technology and redeploying the proceeds into less loved parts of the global stock market including small capitalization stocks in the U.S. and European stocks.

In addition, we are maintaining a meaningful allocation to emerging markets, especially focused on Asian consumer and technology companies. These companies are growing rapidly and offer better value and higher expected returns than their American counterparts. Moreover, China has done a particularly good job in quelling the growth of Covid and is now allocating close to $6 trillion to stimulate their economy.

We are also maintaining an allocation to gold in client portfolios. If governments around the world are willing to borrow and spend and central banks are willing to print money to accommodate this, the intrinsic value of paper money and government bonds should deteriorate. We therefore think that it is important to own assets that can maintain and increase their intrinsic value over time.

Although bonds are perceived as a safe harbor in the storm, with interest rates at historical low levels in many parts of the developed world, bonds look to be even more expensive than most stocks. This is especially true for government bonds which pay next to nothing in income and have a high sensitivity to rising interest rates. They may act as a store of value in the near term but are almost certain to lose real value - meaning actual purchasing power - in the long term, especially if inflation and interest rates start to rise.

Finally, we are also holding an added cushion of tactical cash. While there are pockets of value to be found, stocks overall are no great bargain. We think it makes sense to adjust our allocation mix as described above, but also maintain a defensive overall posture until valuation levels become more attractive or specific opportunities present themselves.

We continue to invest with a global focus; balancing investments targeted at areas of long-term growth and innovation with more defensive equity, alternative and fixed income strategies aimed at mitigating volatility and risk.

As always, please let us know if you have any questions and/or if there is anything we can help you with relating to your financial life. And, if we can ever be of any help to a family member or friend, we always welcome referrals from our clients.

Jurika, Mills & Keifer,
October 2020

Important Disclosures

Opinions expressed are those of Jurika, Mills & Keifer, LLC, and are subject to change.

Investments in securities involve the risk of loss. There can be no assurance that investment strategies referenced will be successful, or that investment objectives will be achieved. The net performance represents performance figures net of all fees including management, performance fees, transaction costs and commissions. Past performance is no guarantee of future returns, which may vary. Please note that one cannot invest directly in an index.

This communication is neither an offer to sell nor the solicitation of an offer to buy a security or advisory services, which can only be made by the appropriate offering document.