As America continued to recover from the COVID-19 pandemic in the first half of 2021, the U.S. economy and the stock markets made significant progress.
The ValueAligned Model Portfolio (“VAP”) is up +16.10% for 2021 as of Friday July 2, 2021. The S&P 500 Index is up +16.75. Please see the disclosures at the end of this letter or on our website www.valuealigned.com.
ValueAligned Partner’s General Principles
Since 1960, the Standard & Poor’s 500-Stock Index has appreciated approximately +70 times; the cash dividend of the Index has gone up about +30 times. Over the same period, the Consumer Price Index has increased only +9 times. At least historically, then, mainstream stocks have functioned as an extremely efficient hedge against long-term inflation and a generator of real wealth over time. We believe this is more likely than not to continue in the long run, hence our investment policy of owning the stocks of successful companies rather than lending to them. We buy stocks not bonds or commodities because at this point only stocks offer enough income to beat inflation and taxes.
We believe that acting continuously on a rational plan-as distinctly opposed to reacting to current events-offers us the best chance for long-term investment success. Simply stated: unless our goals change, we see little reason to alter our financial plan. And if our portfolio is well-suited to that plan, we do not often make significant changes to that, either. For instance, we have owned our best compounders like Autozone (AZO), Markel (MKL) and Microsoft (MSFT) for over 15 years.
We do not believe the economy can be consistently forecast, nor the markets consistently timed. We are therefore convinced that the most reliable way to capture the long-term return of stocks is to ride out their frequent but ultimately temporary declines. We also take advantage of those declines by putting more money into stocks of great companies during those declines.
The American economy continued its dramatic recovery in the first half of 2021, spurred by
- the proliferation of effective vaccines against COVID-19 and the retreat of the pandemic,
- massive monetary and government cash infusions, and
- its own deep fundamental resilience, which on this Independence Day ought never to be underestimated.
The S&P 500 Index which most be use as a proxy for the stock market ended the first half at 4,297.5, an increase of +14.4% from its close at the end of 2020. If we throw in the dividends, then the S&P 500 was up +15.2% in the first half of 2021. Coming into this year, the consensus earnings estimate for the Index in 2021 was around $165 per share of the Index; as I write, the consensus for the next 12 months has reached $200, +21.0%, and is still going up. The pundits have underestimated the economy’s resiliency from the start.
The economy continues to struggle with supply chain imbalances, as well as with a historic mismatch between the number of job openings available and continued high (though rapidly declining) unemployment. The chattering class of pundits and financial journalists continues to speculate on when these blockages will clear; to long-term investors like us, the key is our belief that they will, in the fullness of time.
We are still amid an unprecedented (reckless in my opinion) experiment in both government and monetary policy; the outcome remains impossible to forecast. The possibility that we have overstimulated the economy was highlighted this spring by a significant resurgence in inflation. But as the first half ended, statements by Fed Chair Powell and Fed Governor Bullard indicated a keen awareness of this risk, and a readiness to act against it.
The markets evidently took these gentlemen at their word, as inflation hedges like gold and oil sold off, the stock market pulled back modestly, and the interest rate on the bellwether 10-year U.S. Treasury note retreated to about 1.5%. We do not want to read too much into short-term phenomena like these; suffice to say that the Fed appears acutely cognizant that its credibility is almost existentially on the line here.
There is also the issue of the Biden administration’s radical tax proposals with respect to capital gains and estates. The best that can be said on this subject is that, as the first half ended, the momentum behind these initiatives seemed to be ebbing. But the political climate remains as inimical to capital (and capitalists) as it has been in a long time.
Nonetheless, for investors like us, I think the most important economic report of this whole six-month period came just a few days ago. It was that household net worth in this country spiked +3.8% in the first quarter of 2021-to $136.9 trillion-propelled by broad gains in the stock market and in home prices. Even more important, perhaps, is the fact that the ratio of household debt to assets continued to fall, and is now back down to about where it was 50 years ago.
The consumer powers this economy, and the consumer has rarely carried more manageable debt levels relative to income-and has simply never been holding more cash-than he/she does today. In June, the National Retail Foundation raised its outlook yet again; it now expects retail sales to grow +10.5% to +13.5% (that is, $4.44 trillion to $4.56 trillion) year over year. Just this past month, the retail giant Target raised its dividend by a whopping 32%.
On February 19, 2020-the market’s peak just before the pandemic took hold-the S&P 500 closed at 3,386. It then proceeded to decline -34% in just 33 days, amid the worst global health crisis in a century. But if you bought the Index at that epic top, did not get scared out, and were still holding it on June 30 of this year, your total return with reinvested dividends has been close to +28%.
I’ve never seen-and don’t expect to ever see again-a more vivid demonstration of famed investor Peter Lynch’s dictum that “The real key to making money in stocks is not to get scared out of them.”
When the pouting pundits of pessimism are screaming from everywhere to get out of the stock market, our advice is the most valuable. And get ready because the stock market always goes down. Sometimes it goes down by a lot, but it has always recovered too.
Thank you for being my clients. It is a privilege to serve you.