Jeremy Witbeck:

Hello, everyone, I’m Jeremy Witbeck partner at Polaris Wealth.. And I have with us today, Jeff Powell. Jeff is our chief investment officer. And he is also the managing Polaris. Jeff’s great to have you this morning. 

Jeremy Powell:

Good morning. 

Jeremy Witbeck:

So Jeff, really looking forward to the 2021 forecasts that you will be presenting later today. And I was hoping that you can give us a sneak peek of a lot of the items that you’re going to be covering in much greater detail when we speak and give us a not only a forecast of what we’re expecting, and the things that we’re watching this year, but also talked a lot about how we got here, and the events that transpired in 2020. That’s kind of built up to the point that we’re at now. So if you don’t mind, you can summarize. And I know this is a tall order that some of the things that transpired in 2020, and why we’re looking at and paying attention to the things that we are this year.

Jeremy Powell:
Yeah, absolutely. So actually kind of going back and preparing for the event and kind of trying to recap on what did go on. It’s, it’s pretty amazing. When you look back at some of the news stories that that didn’t know that, that were big at the time, they kind of came and went very quickly because obviously most of last year, and really, but most of this year is gonna be driven by one thing and one thing only, and that’s COVID-19. While COVID-19 was definitely the largest destroyer in 2020. You gotta remember there were some pretty huge things that went on during the year like the United Kingdom withdrew from the European Union. We had another impeachment, Donald Trump was impeached. The trial began January 16, he was acquitted of February 5. Again, something that you may not even remember that happens during 2020. There was some kind of cool stuff that went on, SpaceX was the first private company to launch astronauts into space. We also had some pretty tragic things going on the wildfires that went on and California and on the west coast, it was the worst fire season on record for California with the largest ever wildfires that we’ve had and size. The East Coast have never been easier or that we had the the worst hurricane season on record with having over 30 names, hurricanes during the course of the year. Those actually kind of pale in comparison to things like the joyed George Floyd death, and really the Black Lives Matter movement that really changed I think, hopefully our country for the better and a lot of ways with a lot of the the social injustice and the change that has been called upon with this country. And then we added to that when an election, you know, and and the 2020 election, really kind of I’ve been joking is kind of the icing on the cake, which, you know, could only have happened during 2020. So that’s kind of a bigger mark up. But you know, kind of taking you through a little bit of the details of the market, if you remember, the beginning of 2020 started off strong. I mean, it was kind of the tail end of what we had seen in 2019. It was kind of a continuation we’d seen a nice move up. Yes, we had heard of a Coronavirus going on and China. But it was really kind of more of the fear of how it would impact us companies. So we had a little bit of a dip in the market in January. And companies like Apple and Microsoft and Intel, who had industrial production or had parts coming from that area that were absolutely influential on the productivity of those companies. We saw some downward pressure, but then we kind of blew it off and things continue to move up. And so the wheels came off, the wheels really came off. Jeremy, if you remember, the markets peaked in February 19. Then we went into a weekend and over the weekend, stories started coming out and sort of getting much more clarity to how bad COVID-19 really was. You know, prior to that point, yes, the United States that had a case or two, you know, really located up in Washington State only. But this news report came out and said that COVID-19 had spread to at least 30 countries. And that news alone led to what I consider Well, I don’t even consider I know is the fastest 30 plus percent drop in the markets history. You know, from top to bottom, we saw it’s a 23 day slide in our markets, where we saw almost 34% drop in the s&p 500 and then the recovery. I mean, so we didn’t stop dropping. And so the House of Representatives passed the largest stimulus package in our country’s history. The cares act was a $2 trillion package. And so with that, you know a lot of money being thrown a corporation small business loans to keep people employed. But we had about a quarter of the cares that go directly into the American public’s hands with money going towards just direct payments, and then also unemployment insurance for those who lost their jobs. So that alone, sort of the recovery. And then we also had the PPP or the payroll protection plan, come out and April, and that again, really kind of gave the the average investor a the knowledge base that the US government was going to do a, Jake, whatever it takes type of mentality to support the economy, in the support the markets, which again, just kept a juggernaut, move in the right direction. By August, the markets have recovered, all the loss that have occurred in February and March. And then the tail end of it really, for 2020, we had a dip in September, another dip in October, and those were really kind of surrounding, you know, is there going to be future stimulus going on. And also a little bit of, you know, protection to portfolios ahead of the election. And then once the election was behind us, you know, once you know what you don’t know, the markets tend to rally off of that. And so once the election was done, regardless, again, of your political ideology, you at least do what was going on? market started moving up and finished the year up quite substantially? Yeah, well, let me put it that way. Java 2020, had a lot. Go on. And you’re right, a lot of it was overshadowed by the pandemic. And I think we forgot a lot of those other things. And, and to your point, some really good things that happened. While it’s amazing that a private company like SpaceX, was able to, to work with NASA to send or to send astronauts into space. So a lot of incredible things as well. So with all of this, Justin, that ties into what we’re expecting to occur in 2021. So what are some of the trends and data points that you’re looking at to help give you some insights into where you think this market might be going? And what the US and world economies want to shape up? Like?

Jeremy Powell:
Yeah, so 2021? Again, it’s a shift. But it’s, it’s a still a everything to do with COVID. What we’re really looking at is how do we get back to any kind of normalization? So when we’re looking at it, kind of in that context, right now, we are still very much trying to recover from the the hit to our economy. I mean, if you remember, from previous pieces, we have unemployment at levels that we had not seen since the 1930s, we had the largest one quarter drop in GDP history. So how do we recover from those types of things, without having the government really be the full stimulus behind it? And really, what it comes down to is, right now, there are two very highly effective vaccines, one from Pfizer, one from a darna that are already being produced, they’re already being distributed. The question is, how can we ramp that up to make that as quick as possible, not only in the United States, but globally, because in order to really kind of knock COVID out of the major headline and having it be in the rearview mirror, we have to get to a point where we have what is referred to as herd immunity. I don’t mean like herd isn’t hearing I mean herd like a herd of cattle, you know, you need enough people in our population that have the antibodies, either through actually producing themselves through having had COVID or through actually being inoculated or immunized through getting the vaccine. We need to get to kind of a 65 70% level in order to really knock down this as a global pandemic. And we’re talking about that on a worldwide basis. And really, the hope is that not only these two companies, but there are three other companies that have are close to getting approval on what’s going on with the vaccines. We do have two other vaccines that are out but are less effective than then Madonna and Pfizer. So the really the hope is to get ourselves to a point where enough people have been immunized. So that’s the start of it. From there really the question is, if we were to just wave our magic wand and really the again, the projection is kind of summertime to be at a herd immunity level, but to really see numbers come down quite substantially during the latter part of winter or early part of spring. If we were to see that happen, where’s the recovery? And that’s really what we’re looking at. So 2021 looks like, at least according to a consensus of analyst estimates on s&p 500 companies, the the earnings should actually start slightly stronger than what we saw in 2019 2019 was an incredible year 2022 looks even better than 2021 with regard to earnings estimates, but again, we don’t want to get over our skis here. Really the question is where within the markets and where my fear is that you had the largest price movement differential between large cap growth and large cap value since 1999. Now, the large cap growth marketplace in 2020 was up 39%. And value was up less than two, we have not seen that kind of differential since 1999, you did start a trend in fourth quarter where value outperformed growth by about 5%. And we expect that trend to continue well into 2021. As we’ve discussed in previous podcasts, we’ve also discussed it in our educational pieces, called the players perspective. What ends up happening is when you lead out of a major watershed events, there’s leadership getting you out of it, there’s the recovery leadership, and that leadership tends to them with a route because it’s gotten back to proper valuations or even properly, or even possibly overvalued. And what you tend to have happen in those kind of situations, Jeremy, is the markets will get ahead of themselves in those particular categories, then they’ll kind of stall out, maybe even lose a little bit of money. But it’ll be other areas of the market that will really be picking up that next leg in the market.

Jeremy Witbeck:
That’s very interesting. And understanding kind of where the leadership was last year. And then where some of the upcoming trends, I think one of the things that I’ve heard some concern about is, you know, 2020 was such a strong year and some of the stocks that sell well, what’s left in 2021. And what I hear you saying is that, well, that may be true on the growth side value really hasn’t had its time to shine yet. And so it sounds like there’s a tremendous amount of opportunity. On the value side. Do you mind jumping into some of the specific sectors and different areas of the market that you’re eyeing? That looks like they may be outside opportunities this year?

Jeremy Powell:
Yeah, absolutely determined. So again, one of the things that we’re constantly looking at as a firm is, we don’t want to be buying the nosebleed level companies that have you know, have had a rocketship struggle stronger than 45 degree angle up. I mean, if you look at companies like Tesla, while we’ve had that, in our growth strategies, we’ve we’ve taken it out, there’s no way in the world that that, that a company continue to sustain a price movement like that. And when a game of musical chairs ends, those are gonna be the areas of the market, they get hurt. So just even looking again, and just to make your point, and then I’ll jump into sectors that look the most attractive to us. You look at a thing called linear regression. Linear regression is just basically a growth pattern over time in which different segments of the market have sustained. And then you look at see, you know, is it ahead of it as a below it, you know, historically, there’s a thing called reversion to the mean, where if you get too far above that line, it gets pulled back down. And if it’s too far below that I get pulled back up. Right now, if you’re looking at linear regression as your n numbers, growth is overvalued, not only on a you know, if you’re looking at the top 10 companies, from a historical stamp from from PE ratios, you’re looking at them being 173% of normal, large cap growth as an overall category is about 168%. above normal numbers. Linear regression is not as bad it’s about 8% above where it normally as linear regression on the other side for value would show a 45% growth, just for it to come back to its historical numbers. So again, another reason why we’re really looking at those kind of figures. Within this the the sectors, the ones that look the most appealing to me, are industrials, materials, some some areas of consumer discretionary. So again, your Amazon’s Your Home Depot’s of the world have really already had their big run. But it’s other areas of the marketplace that look much more attractive within consumer discretionary. And then consumer services also looks fairly attractive when you’re looking at the earnings growth potential of the particular area and also matching that with the current valuations within that particular segment of the market. We also like financials, we also like energy. Those are more regression to mean things where these are areas of the market that we’re down and down a lot in 2000 and 2004. We think that there will be a recovery within those areas. And you know, it’s not to sit there and say that your information technology sector of the market won’t do well. It’s just not going to be the juggernaut that it was in 2020. And so while you may want to be looking at it, it is 27% of the stock market. After all, you want to use some caution there, and be very, very selective of your names, your resumes, or the world or Amazon’s things that were really the high fliers, within the 2020 market, boys are not going to be able to have the same sort of sustainability in 2021.

Jeremy Witbeck:
That’s, that’s great. And I think one of the mistakes that we sometimes make, as individual investors is we look at historical patterns say, wow, that stock did really well. So let me buy it now to carry that into 2021. And your points will noted that it’s something overran right, it’s probably going to lag and underperform. And so I think one of the key differentiators on strategies that are able to sustain their growth rates not looking at what has done well, but forecasting what’s expected to do well. So really appreciate your insight there. And of course, I’m fully understanding that plus looks at this stuff daily. And one of the great things about the strategies is that you know, everything that you’re sharing is what we know today, a month later, the picture may change a little bit. And our strategies will incorporate that research and make sure that we stay invested in a manner that correctly aligns with Ford macroeconomic research. I do want to talk a little bit about inflationary pressures, interest rates and the bond segments of the market. We’ve talked a lot about the equity side, a lot of people appear to have been drawn into bonds to flee some of the volatility that was being experienced in the equity market. What is the 2021 forecast for those areas of the market? And are there any cautions that you would have for people that are in that segment of the market?

Jeremy Powell:
Yeah, great question. Jeremy. I mean, the ball market, obviously is a little bit different than the stock market. I mean, you’re dealing with a, a market right now. 10 year treasuries actually moved up from 90 basis points to about 110 basis points. That’s a nice way of saying 1.1% versus point 9%. In the market. And we have inflation, though, that’s sitting at about 1.65. So if you were looking at kind of your round numbers, just to make you know, some consistency to the conversation, a person who’s going out and buying short term, intermediate term fixed income, especially treasuries, while your statement may show some income coming in, again, from a historical standpoint, these are very low yields. What you’re really saying that you’re willing to do in a situation as though some of your buying power, I’ve kind of joked with people and said, okay, you know, if I came to you and said, I had an amazing investment for a chairman, you know, you give me $100,000. And in 10 years time, I’ll give you a 93 back guaranteed, you know, that’s really what you’re talking about, you’re losing about seven tenths of 1%, every single year over a 10 year time period, you’re losing 7% of your buying power, over a multi decade time period, that can be a major erosion of your buying power. So people who are looking for stability, you know, things that we’re looking at high yield, we’re looking at preferred stock, we’re looking at convertibles, we’re looking at international, we’re looking at tips, we’re looking at out of the ordinary type of fixed income that can actually give you a little bit more in the way of fixed income, we’ve, as a firm started to invest in alternative yielding investments, something that we don’t have time to go into today, and really can’t talk about because of the need for the person to be an accredited investor. But there are there are instruments out there getting 567 percent income, that you should call your Polaris wealth advisor to talk more about the biggest loser last year, however, if you’re looking at it was the dollar, you know, the dollar lost money. So again, as you’re looking at it as the US prints money, the one thing you’re seeing is a devaluation of the dollar. devaluation of the dollar means you need to offset that with growing your portfolio. And so again, long term, when we’re sitting on $27 trillion of debt, you know, the easiest way for the government to make that those trillions go away, is devaluating currency. devaluating currency means loss of buying power means that your investment, your portfolio needs to be able to offset it in one way, and you’re not going to do it or picking up 1% here or there. It’s just not going to happen within the fixed income marketplace. So we’ve been really encouraging a lot of our clients to really rethink what their consideration of risk is, you know, while bonds do add stability to a portfolio so that there’s not as much monthly volatility within what they’re gonna see in their statements. is really not providing them quite the stability that they really think that it is.

Jeremy Witbeck:
Yeah, Jeff. Well, that’s that’s great advice. And something that’s that we’ve certainly talked a lot about. And I mean, overall, I’d say people have been pretty lucky is probably the wrong word. But pretty fortunate that interest rates haven’t moved all that much over the last five years. But your points well noted that if interest rates really did start to move, if we started seeing inflation in any kind of significant fashion, which, no, it’s not just flourish, but a lot of a lot of economists, a lot of firms are starting to predict. I don’t know that a lot of people understand the risk exposure that they have there and something that they need to be watching very closely. On. Thank you so much, Jeff, for kind of going over some of the items that we’re going to be talking about later today, any last message or any last words of advice, heading into 2021, that you want to leave with everyone,

Jeremy Powell:
the biggest thing that I would throw out is when we’re looking at the the market, you know, too many too many people take too much of their time looking at benchmarks. And we’ve kind of beaten up benchmarks before. But I want to, I’m going to kind of finish up on one note here. And that is, when you do have the top 10 stocks in the s&p 500, representing as high of a percentage, as they do right now, which is, you know, basically 25% of the s&p 500, almost 30 is controlled by these top 10 companies. And they’re trading at 172% of normal, the likelihood of having the s&p 500, having a stellar year in 2021, is limited. I mean, it’s it’s limited in the context of that being said, it does not mean that you can’t make money in this market, this is going to be a stock pickers market, this is going to be a value market, much more so than a growth market. So the dividend payers should do much better than the non dividend payers, during the course of 2020. And you’re going to be looking at areas of the market have not done well are going to be recovering names. Those are gonna be the areas of the market that I believe that are going to really kind of shy and so while we don’t see this being a easy market from a index only basis, I will tell you that the investment team of Polaris wealth advisory group is actually very excited about what we’re seeing already. And the first few weeks of the year, we’re already outperforming across the board and all of our strategies, but what we think is gonna be a lot of value add to our clients, by the specific nature of what we bring to the table by the dynamic, tactical way that we manage money. So I’m actually really looking forward to 2021 I know it’s not going to be a 2017 where the markets go straight up. We’re gonna have some hiccups. Some of that might be due to distribution of what’s going on with the vaccines or whatever else that we’re seeing within it. But I think that there’s a lot that we can do as an investment firm for our clients during 2021. So I’m, I’m pretty excited about it.

Jeremy Witbeck:
Yes. Well, that’s a that’s a great, let’s leave this on. I think something that we forget is that even though there’s a little bit of craziness, and that certainly creates volatility that I’ll put that also opens up opportunity and it’s something that I know as a firm and our portfolio management team really embrace and try to take full advantage of. So that Jeff, thank you so much for your time. Really appreciate your comments and insights on these various aspects and to your audience. As always, be happy, be safe and be healthy.