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Businessman to climb Crossing over coronavirus crisis in 2020 concept, over pass financial problem, survive and win in Coronavirus outbreak COVID-19 economic crisis

The year of 2020 will be remembered for the COVID-19 pandemic, protests against racial injustice, debates over returning to school or the office, and political posturing.

It will also be remembered for the confounding behavior of financial markets. They rallied, even though the world and the economy still feel chaotic and broken.

Jeff Powell, CIO, Managing Partner & Founder of Polaris Wealth & Jeremy Witbeck, Partner at Polaris Wealth, explain why they are more optimistic, particularlly for next year.

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0:04
Welcome to today’s thirst podcast. I’m Jeremy Witbeck, a partner Polaris Wealth. And we have with us as always Jeff Powell. So Jeff is our managing partner. And he’s also our chief investment officer. Jeff, good to have you this morning. Good morning. So today, we’re going to talk a lot about some of the recent events and the impact that’s had on the market. And so clearly, with the vaccine news coming in, there’s been a lot more optimism. Jeff, can you kind of lay out the land of why people are feeling much more optimistic, and some of the changes that we’ve seen take place and the way the markets are behaving? Yeah, happy to. So obviously, the big news of the recent week, 10 days has been not only do we have Madonna’s vaccination, but we had Pfizer come out and say that they were over 90% effective. And talking to a lot of doctors really that the hope was that it would, we would find a vaccine that was north of 15. So to be in the 90s is quite remarkable. It kind of seems like a back and forth between the two that are proceeding with Moderna, originally, Pfizer said that they were 90% effective in them, and they’re not came out and they’re like, well, we’re 95% effective. Now. Today, Pfizer came out and they’re like, we are two or 95% effective as well. So a there’s a lot of optimism on FDA approval on is obviously the neither are approved at the moment for distribution. Through the FDA, a lot of optimism, though through the medical field that these are very effective and what they’re talking about. And then obviously the the true hope is getting back to life as we knew it. What you are seeing as a result of that is what was working, you know, the high flying work from home state from play from home type of situations are, are now beginning to shift some. And so recently, I mean, just even looking at, for example, the Russell 1000 value versus the 1000 growth. For the last year, we’ve seen this huge disparity about a 40% disparity between growth and value, favoring growth over values. If you look at just the last year, last 12 months rolling, we started to see a compression of that. So large cap growth is up 36% for the last 12 months. Right now we’ve got large cap value up just shy of two, that doesn’t sound significant. But when you had over a 40% variance between the two, and now we’re down to about 35 34%, you’re starting to see value outperforming growth in a very big way. So for example, month eight, the Russell 1000 value is up 13%. The Russell 1000 growth is up eight and a half and over over this quarter, it’s almost a 7% advantage to value over growth. So we are starting to see it and then you’re also starting to see a breath of it. So we oftentimes look at not only the s&p 500 and what’s going on, but also the the equal weighted s&p 500. You guys have seen me write about that a lot saying, hey, the Fab Five and the disconnect that we’re seeing with regard to assets, it’s not that the Fab Five isn’t still going up and producing, it’s just that there are other areas that are doing better. So for the quarter, the equal weighted, s&p 500 is up 13%.

3:32

And the s&p is up seven and a half. So you are starting to get a wide breadth of movement within the stock market, which historically has been a very healthy thing to say it Jeff, that’s that’s really interesting, because typically what what you’d expect to happen is growth companies start to do better when it looks like the economy is going to continue to start expanding. And value companies historically, they hold up better, but then they don’t recover as much as a growth company. And this is kind of flipping it on its head where you have the opposite going on. Can you kind of break down why that is and why this is reacting a bit differently than what say a textbook would explain to that should be happening. Yeah, absolutely. So it historically when we have issues with markets, they’re led by typically a recession, or led by a overvalued market. This is why you will see a material pullback in the market. But the textbooks really what you’re gonna be talking about is is going into more of a recession. When you go into recession, obviously you start to see

4:40
a pullback economically. So all recession is is looking at the economy as a growing or shrinking and technically a recession is when the economy shrinking. And so what ends up happening is there’s less money to go around. So if you kind of think about it, you know, there are let’s just say there’s 10 people sitting in a room, there’s 10

5:00
cups of coffee, everybody’s getting a cup of coffee. Once it sounds a nine,

5:05
maybe everybody’s equitable, and they share with that 10th person that wouldn’t normally get it. But it means that everybody else is getting a little bit less. And so what you’ve historically seen in a recession is the value companies still get their full cup of coffee. And the growth companies which are oftentimes overvalued at that point, really take it on the chin, because there’s less money to go around. Companies hold out on things with, with technology, they hold back their spending. And it affects those types of companies a lot more with what we’ve been dealing with with COVID. And a shelter in place is quite different, where you actually had companies in order to survive having to spend money. So for example,

5:50
camera that I use for going on TV from home now as a Logitech, it’s the same thing that I’ve got at the office, guess what I had to buy a new one for the home office. So a couple is like Logitech companies, you know, that we’re doing home doing Internet Security, you saw what happened was zoom, you saw a huge spike and the work from home play from home, Netflix, Activision, for gaming, a lot of these companies did really well, then, obviously, some of the bigger well known names bang, Amazon, think about how many boxes shipped to your house, Microsoft, Apple, you know, again, a lot of schools had to buy equipment, to be able to send our kids home with it in order for them to be able to take classes from home. So very different activity that’s going on. So the recovery that we’re starting to see is now going back into things like think about, you know, once a vaccine is widespread, and we’re getting herd immunity, what areas will recover better. And so if you think about it in the context of some of its consumer discretionary, so things like how you work and how you play, travel is discretionary. So we’re starting to see hotels, you’re starting to see things like Live Nation of entertainment companies starting to do very well on a recovery. So right now, like an industrial is, are very undervalued, and starting to look very appealing, from the context of we will see those recover. So that’s really, you’re starting to see it again, flip the other direction. The other thing to make note of Jeremy, also with this is, historically speaking, when you have a recovery out of a recession, it’s never the who led us out of the recovery. So you’ve got your typical drop, and then you’ve got the recovery. And that eventually breaks to making new highs down the road, the initial recovery, compared with the recovery down the road, almost never as the same leadership. And so it’s not very unusual to sit there and say, Okay, well, tech, lead us out of this.

7:58
Where do things go from here? And I think that a lot of people are going okay, well, am I gonna really go out and buy Amazon? Right now with how far it’s run up? So where else can I put my money to work? And so it’s really about trying to find some value of some things that haven’t had massive runs. And there’s definitely some very appealing pockets to that. There’s also, you know, when you’re looking at a year, where will we be economically? I mean, we’ve we’ve had a material pullback, economically, you know, spending growth on a corporate level as well as a personal level. So where does it go from there? It makes a lot of sense, Jeff, thank you for kind of breaking that down for us. So now that we’re heading into the holiday season, obviously, next week is going to be one of the big, busiest shopping weeks. Can you give us kind of your reading of the crystal ball as to what you anticipate for the latter part of this year and going into 2021? Yeah, I think that there are some areas of the market that are worth revisiting. If you’re looking at the forward forecast for earnings, industrials look really interesting.

9:05
You’re talking about transportation companies like FedEx and UPS, but you’re also talking about train lines, and so on, that looks pretty attractive within here, then, the real obvious are the airlines that have really gotten beaten up at a level where you can literally see a doubling in value with nothing other than going back to normal. Not that we expect things to go back to normal, I think that you will see some some business activity changes as a direct result of this. Obviously, people are still going to go to conferences, they’re still going to do a number of other things. And there really is nothing better than a face to face meeting. That being said, a lot of travel and a lot of those types of expenses are not as necessary. So I do think that you’ll see a longer time to recover. But airlines are off more than 50% in some cases from their from their highest pretty COVID. So we may see some

10:00
some interesting things, they’re really consumer discretionary. I mean, as we continue to spend money, again, there are pockets of consumer discretionary areas that are definitely looking pretty appealing as well. We’re, we’re continuing to see a

10:16
demographic shift, we just had new housing starts coming out today, much stronger than being expected. So I think that we also continue to see some of the trends. Even without having a virus any longer. I think that people are going to start, you know, continuing to move out of the cities, and a lot more work from home from that vantage point. So I do think that we’ll continue to see a trend there, which should be continuing as a positive thing for a lot of technology stocks that will continue to see strong earnings as a result of that makes sense, and certainly a lot to look forward to. So Jeff, I thought it would be fun to take this time and,

10:55
and then take a Thanksgiving theme and talk about some of the things that that we can look back and be grateful for. So wanted to open up to you and just see if you had any thoughts or anything that you wanted to share? And then I’ll do the same. No, no, I mean, obviously, Thanksgiving is exactly that. It’s, you know, it’s, it’s a time to reflect, it’s time to kind of think back on what has gone on over the past year. You know, obviously, you know, for me, if you’re going to go directly to something like that, obviously, having all family healthy.

11:30
You know, we had

11:32
a distant relative that did die as a result of coven. Obviously, again, destined and also somebody who was quite aged, they were in their late 90s, and lived up a very happy, healthy life. But this has been by far, one of the strangest years that I think that any of us could possibly imagine. Not anything that we were expecting going into the year for sure. And to sit there and go from something like happy, healthy, everybody doing their thing, January to sheltering in place by March.

12:07
And really the kind of overall

12:12
pent up nerves that have gone on I mean, it’s affected our children from a social standpoint, it’s affected people from a stress level.

12:22
Obviously, there’s lots of people who lost their jobs as a result of what went on through the pandemic. So really, for me, if I was going to go through a kind of listing, you know, being thankful that my family is healthy, looking towards our own company, and being thankful for truly the professionalism and the hard work that was put in by our own team. And then, you know, maybe not most importantly, but certainly very far up there. As our client base, we’ve seen our firm continue to grow, even in the midst of what’s going on with COVID. I think that’s a direct representation of what we’ve done from Investment Management. But obviously, it took their loyalty, it took third trust, to be placed with us to even have a company to begin with, I try to remind our clients all the time that you know, you’re my boss, not the other way around, I may be running the company, but I work for you. And so really kind of just a huge thank you to our client base who stuck with us when things were were scary, they a very easy thing to do, we’ve been to try to go to cash. And obviously we wrote about why they shouldn’t be doing that. But obviously, they had choices to trust us in our judgment, that we’d be able to take them through really uncertain times and be able to come up the other side, doing really well, which is what’s been going on for our client base. So having really strong results, especially against our individual benchmarks has been been a fun thing to set there and kind of do, I think that it will lead to much stronger relationships in the future as a result of what we’ve done. But just, you know, it’s their adaptive destiny and being able to now meet with us doing zoom calls versus home visits or office visits and other things is really kind of, I think, for me personally the part of it that I appreciate the most, I definitely want to echo the same sentiment that you shared. I’ll start off with our client base because I would argue that we have some of the best clients on the

14:26
on the planet, just with regard to how understanding on the back end with the COVID precautions that we’ve taken with them and the ability to move to different mediums to meet, zoom or join me being a big part of that and just hearing the genuine concern that they had for us as a firm staying healthy, both on a personal level, meaning our health but also just making sure that the firm was able to navigate the changes that took place this year. And also in Jeff, I know you share the same sentiment, just the family support that we get

15:00
on an individual level that are spouses, children, parents, they’ve been pretty incredible through all of this, and just letting us when we need to burn the midnight oil to deliver the experience and the services that we want to for our clients. Then on a personal note, Jeff, I was looking back. And it’s also been seven years that we’ve been together and just for your mentorship, and not something I’ve talked about, really on this podcast, but I do remember very vividly when you and I first met, and one of the things that you promised was helping me to refine my skills, and that you’d personally mentor me, in using them in helping to articulate them. And that’s something that I’m certainly very grateful for that. I feel personally, maybe you disagree, but that I’ve grown a lot over the last seven years, and you are definitely a big part of that. So just want to say thank you for that as well. Thank you nine, I definitely know that you’ve one of the things that we’ve tried to do with three everybody period, but

16:02
you know, some some absorb it and work with it better than others. And obviously, you’ve done a fantastic job of that over the over the seven years. So don’t stop aren’t going to get a Seven Year Itch on me unstructured knowledge. So no. And I promise I wasn’t fishing for a compliment with that. But I sincerely mean that that flex has been an amazing company, great place to work. We work with amazing clients. And as incredible as 2020 has been the excuse me as incredible as 2029. With all of the challenges, I look forward to 2021 just bring up a vaccine under way and a lot of great things. And I certainly look forward to being able to participate in the markets and to guide our clients as we go through that. Well, I think that all of us could use a much calmer 2021. I was always looking for the 2020 because you talk about perfect vision Well, in 2020 has been far from perfect year. So hopefully we have a calmer, more collect. year to come. We still obviously have to get through another month and a half of this year. But, you know, obviously, again, things are looking up with regard to when a vaccine might be available. And when we might see that. So yeah, it’s been an interesting one to say the least. Yeah, absolutely. Well, maybe we’ll want to perfectly Forget it. Exactly.

17:29
Well, on that note, Jeff, thank you so much for sharing with us your I guess reflection on what’s been taking place and also what you anticipate for next year. So everyone else knows next week will be Thanksgiving, so we probably will not have a podcast recording next week, but certainly be back the week thereafter. But as always everyone thank you so much for listening to us and be safe and be healthy.

17:55
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