First Friday Live – State of the Market in 2021

Thanks for joining today. I am so excited for this First Friday Live. For those of you joining us, you’ll notice that we don’t have Guy with us today, as advertised. He is out sick, so we have Jiorden Sanchez today instead.  


Jiorden works on Guy’s team and is a portfolio manager as well. He is actually more involved with the day-to-day investments, so we’re excited to have him join us. 


Jiorden Sanchez: 

Yeah, thanks for having me. Hopefully, I can do Guy justice here. 


Michelle Bertram: 

I’m sure you will. 


Overall Market Outlook in 2021 


Coming into 2021, people are asking what is going to happen with the market since it is a new year. Especially thinking about 2020, which was probably one of the craziest years that I can remember, people are wondering what they’ll see from the market. Will anything crazy happen coming off of 2020? 


Today, as we speak with Jiorden we’re going to walk through a quick agenda so that we can cover everything that we see happening with the market in 2021. 


We’ll also be touching on the recent investment schemes which have been in the news recently. These could have an impact on your investment future, so I’m going to cover those things as well. 


Interest rates are low and so that brings up a whole other set of questions when it comes to investing in bonds and other alternatives, so we will talk about those things too. 


Another topic will be taxes because now is the time you’re probably getting 1099s for taxes. Some of you might be getting a 1099 for investments, so we will talk about those as well as how you can become more efficient with taxes in 2021 this year as they related to your investments. 

Jiorden, as we have entered 2021, what do you see for the market right now? Is it stable or are we going to see a lot of volatility? Are there key areas that you are looking at? 


Jiorden Sanchez: 

I think the easiest way to summarize it is that generally, I’m optimistic.


If you take a step back and just look at what happened. Last year there were a lot of reasons the market should have been down.  


Two clear examples are the pandemic and political uncertainty around the election, but the market was up 18%. That was not just up. That was a pretty strong year. On average, markets are up 9 to 10% a year and so what I think all that highlights is generally what an accommodative financial, you know backdrop really implies for the overall market. 


The Federal Reserve, in terms of monetary policy, you know the Congress in terms of what they’re doing on the fiscal stimulus side, all that’s generally good for stocks in that it’s good for the economy. 


It’s good for earnings, and generally, they make stocks relatively more attractive than other financial assets. 


As we enter this year, a lot of that’s still in play. We’re hearing conversations about more stimulus and so that’s all still in play. 


What I would say is different this year is we’re probably going to get more widespread participation.  


Again, remember last year is, I know that the market was up 18%, but five stocks were up 60%, the other 4, were up like 10%. Another thing to note is the growth stocks were up massively over 30% value stocks were essentially flat. 


I think this year will be a little different. I think this year will get broader participation and it’s a function of what we generally expect in terms of an economic reopening, right?  


We’ve got a lot of positive news flow as it relates to vaccines. Generally speaking, based on who you talk to by mid-2021 will probably get to a point of, you know, hard muting. Maybe it’s a little later in the year, but the point is, markets trade ahead of that right? 


So, what usually happens is what you’ll see is potentially stronger participation from cyclical stocks. Stronger participation from values. Generally, those types of areas that are tied to a stronger economy and great. 


Michelle Bertram:  

Can you just explain that? 


Jiorden Sanchez:  

Basically, two broader categories of stocks as you think through this cyclical, would be things you’d buy no matter how the economy is doing; like toothpaste. 


I really would hope you’d buy that at every point time, but cyclical things would be things more like cars. Generally speaking, cyclical sectors are things like financials that do better in certain interest rates, environments, materials and industrial sectors. 


Energy sectors, things of that sort, generally a bit more tide to the economy, and so when I say broader participation as we get an economic reopening, will generally have an improving growth outlook, especially relative to the level we set last year. 


That should generally, you know, allow some of these value stocks. Some of these non-big tech stocks to sort of participate.  


One of the points I just wanted to make is, you know, since the third quarter at the end of the third quarter we’ve got a lot of headlines around vaccines, whether it was the efficacy rate initially or the fact that they’re starting to get deployed. 


Since that point in time, value stocks are up 17%. Growth stocks are up 15%, the market 16%. That’s a broad, diversified sort of participation, and I think there’s more of that to come in the new year.  


In terms of how we’re positioned this year, we want to make sure we’re diversified. 


What we largely kind of message to our clients in terms of the way we’re positioning them is sort of a barbell strategy where you have basically no growth and cyclical stocks. 


On one side, we’ve added exposure to some of those sectors I suggested, but you still want to maintain exposure to some of those secular growers. 


If Covid stays with us a little longer than expected, but also growth, stocks are probably still great, really well-positioned in the long term because once we’re past the COVID-related stuff, there will probably still be a relatively low-interest-rate environment. 


Relatively low GDP growth environment and those things generally favor growth stocks. So that’s the outlook and that our current positioning strategy. 


Michelle Bertram:  

Yeah, and I think that Guy says a lot of times don’t fight the Fed and so you know all this other stuff is one thing but you just kind of mentioned that the Fed has already come out and said that where the interest rates are going to stay for a while. 


So that should kind of give a little bit of stability to the things that you’re talking about in the other areas just because of that is that kind of how you look at it too. 


Jiorden Sanchez:  

Things could change. There are always risks on the horizon. Common things that people talk about, or high levels of valuation. 


Obviously, COVID is unpredictable. You know there could potentially be changes in legislation, things like taxes, but these are things you could potentially manage around. 


We have to, you know, make sure to continue to monitor those items. 


Our active approach hopefully continues to allow our clients to participate in equity markets, which is the number one thing. But to do so in a risk-managed way. 


Michelle Bertram:  

You just added a good point and I just want to bring this up a little bit because you said a couple of things. One is like hey, I’m not going to be arrogant enough to predict the future and that you’re trying to get returned in a risk-managed way. So, if we were to just flip back to the calendar year, you know, I think if we were sitting here last February, the beginning of 2020, none of us predicted or saw what came in March. 


I think that’s important to know that how you’re managing it is why we said it’s important to be diversified, which I think is true, but a lot of times people think, well, I just have all these different funds, therefore I’m diversified. Or maybe they have a 60/40 split, so they feel like they’re diversified.  


However, a lot of times we start looking at their portfolio and they end up having a lot of funds that are exactly the same. So, just because you have a bunch of funds doesn’t mean you’re diversified, it just means you have different funds. 


The other thing is, not all management is the same. 


We spoke with Guy in a previous video where we spoke in more depth about your philosophies, but you use a lot of individual stocks, bonds, and securities because then you’re taking more advantage of it versus putting your management towards what’s happening. I think this is key when you’re managing someone’s portfolio. 


What’s different about your management versus it being in funds is if it’s in funds the funds are being managed based on their prospectus, based on what has to happen. 


I know that you and I and the team have adjusted portfolios to match what you see going on and then the second element on each individual. 


If somebody is taking retirement income you make sure that there are things set aside so that income is going to be secured. You’re managing based on what’s happening in the market and in our economy, but also based on that individual.  


I think when you have funds, you can’t do that, nor can you add some of the risk-adjusted things.  


Can you talk about a few ways that you look at that and manage them?  


Jiorden Sanchez: 

Generally, there were a lot of winners and losers. 


There were some subsets of stocks that did very well, others not participate quite as much, and what that generally results in overtime for a particular client is, you know, if a client is not managing those individuals’ stocks or those individual positions, those winners can get very large. 


The end result is an undiversified portfolio that’s reliant on some sort of individual company and poses some company-specific risk.  


If you own an ETF you’re not necessarily managing this risk. For example, if you own the S&P 500 growth ETF, the top five stocks account for 40% of that portfolio. That’s not diversified.  


If you let something like last year continue to ride, you know that’s where the Apples and Microsofts become very big.  


There are a lot of ways we can manage around that risk.


For example, if the client had a stock that turned into a relatively large position, you hold on to it. Now you have that company-specific risk.  


But if you sell it, you obviously have a big tax game, right? So it’s almost like a catch 22.

So in order to manage around those things, one thing we could do is proactively manage around stop losses. 


In this particular instance, a stop loss is a particular trade that basically triggers a sale if the stock price moves below a certain point, and so will analyze the stock. 


From a technical perspective, will figure out where levels of support are and will place a stop loss at that level. 


You can manage that over time as well, so as the stock continues to move up, it will presumably develop other areas of support and we can track that up over time to continue to make sure the client in this particular instance. 


Gains exposure to the upside, but limits the downside risk, and that’s particularly important for a pretty significantly sized position with embedded taxable gain. 


Another option is you can always buy insurance. This is a bit more complicated, but Long story short, if you buy something called the put it would you pay upfront for it? That’s called the premium. 


You buy that put and it gives you the right to sell it at a certain level if it falls below that level. And so if it does, you’ve protected the downside. 


Could you sell at that current level? Another thing you could do is potentially instead of selling that stuff. 


You could sell the put you buy which would now, in theory, have a higher price, and so in many ways, you hedge the decline in the stock, but you didn’t actually have to sell it, so you don’t pay that tax consequence. 


What you end up doing is you pay the smaller level of tax that you generated on the option straight, so there are a lot of different things you can do for an individual client and we have these conversations on a very frequent basis as it relates to kind of helping them manage around their unique scenarios and building a diversified portfolio. 


Michelle Bertram: 

We recently had a client that we moved over earlier in the year. He had a really high position in one company stock that he had worked with. 


He has made a lot of money on it forever, but he was getting to the point that he would like to not have so much exposure in that and just wanted to get up to a certain point. 


That stock did tremendously. It did like 80% gain in like it’s a good problem, right?  


This client doesn’t necessarily want to get in all the technical, but he understands this and Guy called and just said, hey, here’s what we think we should do. 


One thing I like to point out is when you move over to us, we won’t look at your portfolio and say it’s all or nothing. We don’t say sell everything. 


We manage around what you currently have and then if you’re building the portfolio, it’s all those things that you’re doing behind the scenes. 


It’s important to know this because if you have a portfolio that just has a bunch of funds, and nothing is happening in the background, then it is probably not efficient. 


With our clients, especially if they’re getting closer to retirement or in retirement, we can now better manage their portfolio and still get the same or better diversification, but in a smarter way. We will be more tax conscious and more risk management conscious than you can in the fund. 


So the funds have their place. But as we talk about this, a lot of the tools that work, what we’re doing, and what we’re doing can’t be done in a fund.  


What you were saying with the taxes too, you know you might have a high gain and this is something that you know that we’ve talked about quite a bit with Guy, so watch that video to get a more in-depth conversation around that topic of taxes. 


I know what we do is when you have all these individual positions you’re looking for, and if you have something growing over here that’s really high, you have a lot of taxable gains. 


You might also look for things that aren’t doing as well, or things that we can maybe swap out and take a loss so that we can offset again at some point so at the end of the year, you’re not getting this big 1099. 


I call it a Phantom tax, but it seems like it’s you because you didn’t realize any of these gains. So is there anything that you guys do? 


Jiorden Sanchez: 

That’s a great example. We do that throughout the year, but then towards the tail end of the year, we go back and cross your T’s and dot our I’s and make sure that our clients are doing things in the most efficient way.  


Michelle Bertram: 

I think that’s a great tool to be able to utilize, especially if this is mainly for accounts that are not in an IRA or Roth. A lot of people have those accounts and you don’t want to be paying taxes when you can smartly avoid it. 


I have to bring up quickly some of the strategies for risk management. There are all these things on the news, right talking about like GameStop was mentioned and TD Ameritrade’s name is mentioned.   


I think the average person doesn’t quite understand how it works. Can you give us an idea in a nutshell? What should the average person think about when it comes to that? Is it something we should be concerned about? 


Jiorden Sanchez:  

It’s something that’s been coming up a lot. A lot of family and friends that basically never texted me about stocks have texted me about GameStop, so I know it’s on a lot of people’s radars.

What does it mean for the average investor? I mean, let’s just take a look at what it means for the market because that’s where they’re invested. 


What happened with GameStop? It is something called a short squeeze. 


To get to the point for something like that to happen, you need very specific circumstances. 


You need a heavily shorted stock and I can go into detail about you know what is shorting or what’s a short squeeze, but the point I wanted to make here as it relates to should a client be concerned is this; the backdrop is that this is not a heavily shorted market, but that means that there is not a lot of opportunity for “short squeezes” because there aren’t a lot of heavily shorted stocks. 


To put that in context, approximately 1.5% of the median S&P 500 company is currently shorted, right? That is basically the lowest it’s been in two decades, which means that there’s not a lot of opportunity for that sort of highly volatile activity to occur. 


What that really means to me is that there probably doesn’t pose a lot of “market risks,” so an investor who’s concerned and maybe potentially wanting to get on the sidelines, as it relates to that risk, I would urge them to say, let’s take a step back and realize how significant this is and why you might see you know, GameStop go from $20 to $500 and now back to $60 or whatever it is. You know, that’s not what you’re seeing for the overall market.  


Michelle Bertram: 

I know TD Ameritrade was one of the names that we use right and as a custodian and their name was involved with this because there was some stock with the trading or selling. 


TD Ameritrade is a strong custodian. We can go back and forth on whether they are why they did it, or if you think it’s right or not, it probably protected some people because some people hear something in the news and they don’t really know what they’re doing, which is what happened with GameStop. 


There are a few people that would make money and a lot of people that got hurt or that would lose. 


The comments made by a lot of retail brokers. It was just TD Ameritrade that was involved. It was Schwab and Robin Hood too. 


Jiorden Sanchez: 

But broadly speaking, yes there were a lot of restrictions put in place, but I think the broad commentary across all of them was that it was in the interest of mitigating risk for the company and clients and they did it largely. 


I think that was the verbiage used by a lot of these people, and honestly that all makes a lot of sense to me. By restricting trades, as you suggested, brokers were discouraging some of the retail investors from taking levered positions and securities that were highly valued and would leave them potentially exposed to massive pullbacks as it relates to an abundance of caution. 


You can look at the balance sheets of these publicly traded retail brokers, brokerage firms and they’re strong, they’re solid, and I don’t really see it as a concern for them. 


It’s honestly just a pretty typical risk management tool. 


Low-Interest Rates’ Affect On Bonds


Michelle Bertram: 

The last few points I wanted to talk about is we talked about the Federal Reserve being low-interest rates low that really kind of has an effect on bonds, right? 


If we think about it in a really broad sense, you know I always look at it on a teeter-totter, where you have interest rates over here and bonds over here, right? 


If interest rates go up, bond values go down. If interest rates go down, bond values go up, but the problem is there’s really no further for interest rates. 


We have a whole series with Guy that goes into the difference between bonds and bond funds and some of that, but would you say that that’s something that you guys are really looking at as a tool that has used the individual bonds versus bond funds? 


Jiorden Sanchez: 

I would say step one is bonds are part of a diversified portfolio strategy. 


When you meet with that individual client, you determine their particular needs. You figure out what the right equity and bond allocation is from a risk management perspective and from an income perspective. 


If bond rates remain where they are right now, then yeah, bond prices would be stable, which is a positive. But generally speaking, also suggests that they’re just paying a low coupon every quarter given where interest rates are. 


Thankfully, you know we’re not just buying and holding bonds. We’re active managers looking for opportunities. 


Broadly speaking, there are three categories or buckets of bonds. 


There are short-term, high-quality bonds. There are longer-term high-quality bonds. There are corporate bonds that have some sort of credit storyline around them. 


They all move for different reasons. They all react in different ways, whether it’s rates rising rates, decreasing, you know changes in the overall risk environment, and so the point is, just like with an equity portfolio, we can build a diversified portfolio. 


Just like an equity portfolio, we can manage by buying and selling different bonds, we can hopefully try to generate some capital gains as well. 


Long story short is as an active manager one we’re able to put bonds in the portfolio because long term they provide ballast and potential income. 


We also have a team here that’s trading around those as well so it’s not just that income that bond investor with us would get. They would presumably get some capital gains as well, and so I think, generally speaking, we’ve seen our bonds perform well, especially relative to where rates are. 


Michelle Bertram: 

So again, now we’ll put this in the comments later, but check some of the videos that we’ve done with Guy because it goes into depth about this. 


Also, on my last blog that I just did a week ago index annuities and fixed indexed annuities as a bond alternative, there was actually a report in there by a professor who did a whole report on studying and utilizing those, so you can read that and check out all of our lats blogs to see more. 


I also want to quickly bring up the topic of gold and silver. Lately, we’ve received a lot of questions about this topic and I know you have that as a part of your portfolio. Can you explain more? 


Jiorden Sanchez: 

We have a number of equity strategies and we currently own gold in most of them, and it’s probably in those portfolios somewhere around 2 to 5% of the portfolio. We do it as you suggested through an ETF. 


GLD, which is backed by the physical asset for that reason, is pretty highly correlated with the spot price of gold and the decision to hold gold for us is really a risk management tool because at the end of the day, we’re looking to provide risk-adjusted returns to our clients. 


For one, it’s not quite as economic. It’s not economically sensitive. 


Two, it has historically had an inverse relationship with stocks, so that’s where the hedge comes in. 


And then three, there’s a hedge as it relates to inflation too. So you know it’s not unusual for gold prices to rise with bad news like the global pandemic. Or to drop with good news like the expected, you know changes in economic growth. 


But when you’re holding that as part of a portfolio of stocks, for example, that is obviously, economically sensitive, there’s some risk-benefit associated with that. 


The other thing that makes gold particularly interesting here is, you know, given the level of fiscal and monetary policy. 


We’ve been talking about, you know there are some long-term concerns as it relates to inflation, and generally speaking, gold has a pretty strong track record as it relates to good performance during periods of high inflation, and so for those two reasons, one, it provides a hedge versus stocks and two, there’s a potential upside, to the extent inflation you know begins to pick up. 

Those are the two primary reasons why we’re kind of holding it. 


Michelle Bertram: 

In March for our First Friday Live, we’re going to bring on some of our experts in that area on that deal with the physical coins because that can be something too. 


So, we talked about the market this year, as Jordan was saying with the vaccine news and some different things like that, it’s done a lot. 


The markets actually responded really positively to that. 


As we’re kind of going forward and with the Fed keeping their rates low, we see that that is something that should add some stability to the market, so there’s a lot of positives going forward on what it looks like. 


But as always, nobody can predict exactly when there’s going to be a downturn or news that we didn’t know about right. 


Things that happen out of the blue, just like Covid did last year around this time so with that said, Jiorden, is guiding the team that has built-in different protections, stop losses, other tools, hedging, so that when the market does take a crash, you just don’t fall down. 


Last March when it was down like 30% I think your highest growth portfolio was down maybe 15% just because of some of the tools that you utilized and then back pretty quickly, right? 


Jiorden Sanchez: 

Yeah, it’s diversification. You know whether it’s some of those hedge positions, whether it’s stopped losses that proactively sell stocks at certain levels, whether it’s the bonds within the portfolio. 


As I said, they do provide ballast, and for that reason, there’s help there as well. All those things helped. 


Michelle Bertram:  

We’ve been saying for years that we always have to make sure we protect against the downside because, in all honesty, the key to long-term investing is really protecting and not taking the big losses. 


And I think that is more and more key for people that are close to or in retirement, and making sure that your income is secure and correlated with his as well. 


I was talking about having all four areas coordinated investments, risk management, cash flow, taxes, and estate preservation.  


Tax-Efficient Investing & 1099s


All those things need to be coordinated, which also brings me to the taxes, right? If you’re getting 1099s on your investments, that’s something we can go back and do anything from last year, but you want to proactively be looking at.  


If you just have a bunch in bonds or any bond fund, we want to take a look to make sure because there’s a lot of things that aren’t being managed. 


All the things we talked about today do not exactly apply if you’re in just whether it’s a mutual fund and ETF on in bonds or stocks. 


Take a look. Give us a call. We’ll kind of do a review with that. 


I think it’s important to put that out there and make sure that we’re looking at it so that there are other tools available. 


I love working with everyone at United Asset Strategies because of all that you do and guide for our clients, but also for communities like this to be able to just get the information out there and really explain what’s happening. 


If you want to talk to Guy or Jordan and just kind of go on and learn a little bit more about the indoor works or see what’s going on in your portfolio, make sure you reach out to us and we will set that up and do that at no cost because we believe that you should really know what you have right. What type of risk do you have? Are you really diversified? What type of correlation you have? How is that going to get you to meet your goals? 


That’s something we feel like everybody should know, and whether you do anything or not, whether you work with us or not, I think just having that knowledge gives you the ability to know what questions to ask, what to do going forward, and we want to bring that clarity and then help you with the next step. 


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