2021 MARKET UPDATE WEBINAR - WITH CHIEF INVESTMENT OFFICER JEREMY DEGROOT - LITMAN GREGORY ASSET MANAGEMENT
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2021 Market Update Webinar with Chief Investment Officer Jeremy DeGroot
Today’s Speakers
Gretchen Hollstein, CFP® Jeremy DeGroot, CFA®
Senior Advisor, Principal Chief Investment Officer, Principal
2
Topics We’ll Address Today
• Review of 2020; Market Performance & Portfolio Actions
• Apparent Disconnect of Wall Street vs. Main Street
• Market Trends Emerging in Late 2020
• Macro Economic Outlook for 2021
• Investment Opportunities in 2021 and Beyond
• Perception of Risks: Federal Debt/Deficits, Monetary Inflation, Dollar Debasement
• Interest in Speculative Investments
• Diversified Portfolio Management Strategy in this Environment
3
Market Review: Assets Class Performance in 2020
Bonds Stocks Alternatives
25.0%
20.0%
20.0%
18.2%
15.2%
15.0%
9.7%
10.0%
7.6% 7.3%
6.2% 6.3%
5.0%
3.1%
0.0%
Invest-Grade Floating-Rate High-Yield U.S. U.S. Developed Emerging Alternative Managed
(Interm-Trm) Loans Larger-Cap Smaller-Cap International Markets Strategies Futures
2020
4 Source: Morningstar Direct. Data as of 12/31/2020.
2020: A Tumultuous but Ultimately Positive Year
7.8%
U.S. Treasuries
0.2%
1/1/2020 - 3/23/2020
6.3%
U.S. Dollar
-12.2%
3/24/2020 - 12/31/2020
1.0%
U.S. Invest-Grade Core Bonds
6.4%
-20.1%
Floating-Rate Loans
29.0%
-20.6%
U.S. High Yield Bonds
33.6%
-30.4%
Larger-Cap U.S. Stocks
70.2%
-31.8%
Emerging Markets Stocks
73.5%
-33.2%
Developed International Stocks
61.4%
-39.7% 99.1%
Smaller-Cap U.S. Stocks
-40.0% -20.0% 0.0% 20.0% 40.0% 60.0% 80.0% 100.0%
5
LG Added to US Stocks in March 2020, which Gained 50% to Year-End
4000
3800
3600
3400
S&P 500 Closing Price
3200
3000
S&P 500 gained over 50% from mid-March
2800
2600 LG added
to U.S.
2400 equities in
mid-March
after ~30%
2200
decline
2000
6
LG Swapped Europe for Emerging Markets in May, Boosting 2020 Returns
20.0%
10.0%
0.0%
-10.0%
-20.0%
-30.0%
LG swapped Europe
for Emerging Markets
-40.0%
Emerging Markets Europe
7
Since the April Plunge, Economic Data Have Been Positively
Surprising, Boosting Financial Markets
8 Source: BCA Research; Citigroup Global Markets Inc.
The Market is Anticipatory: Reacts in Advance of GDP Decline and Rise
4,000 80.0%
Real GDP Growth (right scale)
S&P 500 (left scale)
3,500 60.0%
3,000 40.0%
Q3: 33.4%
2,500 20.0%
Q4: 6.0%
2,000 0.0%
Q1: -5.0%
1,500 -20.0%
Q2: -31.4%
1,000 -40.0%
Jan-20 Apr-20 Jul-20 Oct-20
9 Source: U.S. Bureau of Economic Analysis, Federal Reserve Bank of Atlanta, Yahoo! Finance. Data as of 12/31/20.
Labor Market Recovering Rapidly — But Still Far From Recovered
Permanent Unemployment vs. Other Downturns
10 Source: U.S. Bureau of Labor Statistics. Chart concept courtesy of Guggenheim Investments. Data as of 11/30/20S&P 500 “Under the Hood”: FANMAG stocks vs. the S&P “494”
FANMAG
Stocks
S&P 500
Index
S&P 494
Index
(without
FANMAG)
11 Source: Ned Davis Research, Inc.Market Review: Asset Class Performance October–December 2020
Bonds Stocks Alternatives
35.0%
31.3%
30.0%
25.0%
20.0%
16.3% 16.5% 16.6%
15.0%
11.4%
10.0%
6.5%
5.8% 5.9%
5.0%
0.6%
0.0%
Invest-Grade High-Yield U.S. Larger Cap U.S. Larger Cap U.S. Developed Emerging Alternative Managed
(Interm-Trm) Value Growth Smaller-Cap International Markets Strategies Futures
Q4 2020
12 Source: Morningstar Direct. Data as of 12/31/2020.COVID Mobility Trackers: Real Time Measures of Activity,
Recovered in the Summer but Weakened into January 2021
* Mobility trackers are real time requests of web browser services for data on retail, recreation, and
workplace visits, use of public transportation, and drivers' routing requests. They provide real time
data reflecting changes in economic activity.
13 Source: Google, Apple, Moovit, Capital EconomicsU.S. COVID-19 Statistics: Key Risk in Near-Term Economic Outlook 14 Source: The COVID Tracking Project
Accommodative Monetary and Fiscal Policy Should Support the
Economy and Financial Markets Over the Near-Term
15 Source: Ned Davis Research.The Fed Has Again Hugely Expanded Its Balance Sheet via
Quantitative Easing (QE) …
The Fed’s Balance Sheet in Perspective
16 Source: BCA Research… As Have Other Major Global Central Banks
Global Central Bank: Balance Sheet
* Sum of the BOE, ECB, FED and BoJ
17
Source: BCA ResearchFiscal Policy/CARES Act Had a Huge Positive Impact on
Personal Disposable Income, Offsetting the Shutdown
18 Source: BCA Research 2021U.S. Stocks Are Expensive But Still Attractive Relative to Bonds
US CYCLICALLY-ADJUSTED P/E GLOBAL EXCLUDING US CYCLICALLY-ADJUSTED P/E
50 50
• U.S. stock valuations, as
40 40 measured by the Shiller CAPE
(cyclically-adjusted price-to-
30 30 earnings) ratio, are at a level
not seen since the dot-com
20 20 bubble.
2000 2020
• However, in this environment
of extremely low bond yields,
U.S. stocks still look relatively
US EQUITY RISK PREMIUM GLOBAL EXCLUDING US EQUITY RISK PREMIUM
attractive compared to core
600 600
bonds or Treasury bonds. This
is evident by looking at the
400 400
“equity risk premium,” which is
historically high (a higher ERP
BPs
BPs
200 200
implies stocks are cheaper
versus bonds).
0 0
-200 -200
2000 2020
.
19 Source: BCA Research.Outlook for Emerging Markets vs. U.S. Stocks Is Very Attractive
Rolling 5-year Return Difference: EM Stocks Minus US Stocks
30%
25%
20% EM stocks
15% outperforming Litman Gregory Base-Case
U.S. stocks Five-Year Return Difference
10%
5%
0%
-5%
-10%
-15%
-20%
U.S. stocks
-25%
outperforming EM stocks
-30%
-35%
-40%
1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019 2021 2023 2025
20 Source: Morningstar Direct. Data as of 12/31/2020.A Weaker Dollar Should Also Benefit Foreign Stock Returns
U.S. Stocks / Non-U.S. Stocks (left scale)
350 Real Trade Weighted U.S. Dollar Index (right scale)
130
• The direction of the
U.S. dollar is important
300
for foreign markets
U.S. Outperforming Non-U.S.
120
and the global
economy; it tends to
250
appreciate and
Real Trade Weighted U.S. Dollar Index
depreciate in the
S&P 500 / MSCI World ex USA
110
200 opposite direction of
the global business
cycle.
USD 100
150 Falling
90 • A rebound in the
100
global economy
should be a negative
80 for the dollar relative
50
to other currencies
0 70
1973 1978 1983 1988 1993 1998 2003 2008 2013 2018
21 Source: Board of Governors of the Federal Reserve System. Data as of 12/31/2020.China: Large and Growing Importance in World Economy
and Emerging Markets
Share of World GDP in $USD
USA, 24.4%
Rest of World,
30.4%
Share of MSCI ACWI “All World” Equity Index
Canada, 2.0%
EU, 17.8%
India, 3.3% Other, 24.9%
Japan, 5.8%
China, 16.3%
USA, 56.3%
Canada, 2.8%
UK, 4.1%
China, 4.7%
Japan, 7.3%
USA Japan China UK Canada Other
22Given the Slack in the Economy, Inflation Unlikely a Near Term Risk
• Inflation is unlikely to
move substantially higher,
absent an external shock,
as long as there remains
high unemployment and
excess economic capacity.
• Currently the Fed is
forecasting a 5.0%
unemployment rate for
2021 and 4.2% for 2022.
And core inflation of 1.8%
in 2021 and 1.9% in 2022.
23 Source: Ned Davis Research.Trade-Weighted Dollar Index: US Dollar vs. Other Currencies,
More Room to Fall
The U.S. Dollar Has Fallen More than 10% Since Late March
24 Source: Litman Gregory Analytics, LLC; Data from Board of Governors of the Federal Reserve System as of 12/31/2020.Bitcoin’s Price is Extremely Volatile! 25 Source: Bloomberg, Goldman Sachs Global Investment Research.
Bitcoin Performed Poorly During Last Year’s Equity Bear Market 26 Source: Goldman Sachs Asset Management, Bloomberg; Data as of 4/3/2020.
The Stratospheric Rise of Bitcoin vs. Other Speculative Situations 27 Source: BofA Global Investment Strategy, Bloomberg, Financial Times.
Portfolio Opportunities Across Different Environments
Our portfolios are designed to provide exposure to a mix of investments that offer different return and risk profiles
across a variety of economic environments and financial market scenarios.
Mid-High Growth – Low Inflation Mid-High Growth – High Inflation
EM EQUITIES ALL EQUITIES
FLOATING RATE LOANS EM CURRENCIES
INTERNATIONAL EQUITIES
HIGH YIELD BONDS
US EQUITIES NATURAL RESOURCES
Growth
ALTERNATIVE
STRATEGIES
Growth Slows / Shrinks – Low Inflation Growth Slows – High Inflation
(Recession / Deflation) (Stagflation)
SHORT-TERM BONDS
TIPS
INTERMEDIATE-TERM BONDS
COMMODITIES
TIPS
MANAGED
FUTURES
GOVERNMENT BONDS
Inflation
EM: Emerging Markets
28 TIPS: Treasury Inflation-Protected SecuritiesOur Portfolios Are Built to be Balanced, Resilient and Opportunistic
Global Balanced Portfolio Components
Hybrid Investments (Return
+ Risk Management)
Alternative Strategies
Flexible Bond Funds
Long-Term Return Generators
Floating Rate Loans
U.S. Equities
Developed International Equities
Emerging Markets Equities
Risk Mitigators Private Real Estate
Private Equity
Core Investment Grade Bonds
Treasury Bonds
29The Market’s “Mood” Cycles Between Fear and Greed,
Successful Long-Term Investors “Stay the Course”
30 Source: CNN Business, December 2020Markets Have Been Resilient Over Time, Despite There Always Being
a Myriad of Things to Worry About
Subprime Mortgage Crisis
Lehman Brothers Collapse
Housing Crisis
Great Financial Crisis
$640,000 Asian Financial Crisis 2007-2009 Recession
Russian Ruble Crisis 2009 Flu Pandemic
Cumulative Growth of $10,000 Invested in the S&P 500 Index
Clinton Impeachment MERS Outbreak
Y2K European Debt Crisis
$320,000 U.S. Debt Downgraded by S&P
Tech Bubble Busts
9/11 Terrorist Attacks U.S. Gov't Shutdown
2001 Recession
$160,000 Afghanistan War
Black Monday Crash
Gulf War
1990-1991 Recession
$80,000
Los Angeles Riots
World Trade Center Bombing Ebola Epidemic
Bond Market Crisis Taper Tantrum
$40,000 Oil Crisis
Zika Virus
Brexit
Iraq War U.S. Gov't Shutdown
Avian Flu Quantitative Tightening
$20,000
SARS Outbreak U.S.-China Trade War
Hurricane Katrina Coronavirus
$10,000
$5,000
1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020
31 Source: Morningstar Direct. Data as of 12/31/2020.Closing Thoughts
• As always, it is paramount to stay disciplined and recognize when emotion rears its head in
investment decision making.
• Maintain a focus on long-term financial goals and objectives, with an eye to near-term risks.
• Avoid the temptation to time the market — it is a fool’s errand.
• There is always uncertainty, but as an investor it has paid to maintain a long-term,
rationally optimistic view of human progress, adaptation and recovery.
o A recent quote* we liked: “Save like a pessimist and invest like an optimist.”
• We understand that each individual client has unique circumstances. Please contact your
advisor directly to discuss any of today’s comments in the context of your portfolio.
• Most importantly, we sincerely hope you and yours are able to remain healthy and manage
well through this extraordinary period.
32 *quote from Morgan HouselThank you for joining us today!
For further questions, please contact your advisor directly, or the
Litman Gregory Client Services team at:
415.526.4380
information@lgam.com
www.lgam.com
33Disclosure
This writing is provided by Litman Gregory Asset Management, LLC (“LGAM”) for informational purposes only and may contain information that is not suitable
for all investors. No portion of this commentary is to be construed as a solicitation or recommendation to buy or sell a security, or the provision of
personalized investment advice, tax or legal advice. Past performance may not be indicative of future results and may have been impacted by market events
and economic conditions that will not prevail in the future. There can be no assurance that any particular investment or strategy will prove profitable and the
views, opinions and projections expressed herein may not come to pass. A complete list of portfolio holdings and specific securities transactions for the
preceding 12 months is available upon request. All information is subject to change without notice. Any direct or indirect reference to a market index is
included for illustrative purposes only, as an index is not a security in which an investment can be made. Indices are benchmarks that serve as market or
sector indicators and do not account for the deduction of management fees, transaction costs and other expenses associated with investable products. LGAM
does not make any representations as to the accuracy, timeliness, suitability, completeness or relevance of an information prepared by any unaffiliated third
party and takes no responsibility therefore. Any projections provided regarding the likelihood of various investment outcomes are hypothetical in nature, do
not reflect actual investment results and are not guarantees of future results. Investing involves risk, including the potential loss of principal, and investors
should be guided accordingly.
The graphs, charts and other visual aids are provided for informational purposes only. None of these graphs, charts or visual aids can of themselves be used
to make investment decisions. No representation is made that these will assist any person in making investment decisions and no graph, chart or other visual
aid can capture all factors and variables required in making such decisions.
LGAM is an independent investment adviser registered with the U.S. Securities and Exchange Commission (SEC). For additional information about LGAM,
please consult its Form ADV disclosure documents, the most recent versions of which are available on the SEC’s Investment Adviser Public Disclosure website
at www.adviserinfo.sec.gov.
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