Q4 2020: PFM Quarterly Commentary
2020 was a year filled with implausible if not inconceivable events. While we prefer to look forward, a retrospective summary will help crystalize our broader point. While the good news is that 2020 began and ended with all-time highs in the equity market, the bad news is that the middle was rife with a concentration of low-probability events that left most investors in a state of bewilderment. We witnessed a global pandemic, the fastest thirty-five percent stock market decline in history, negative Treasury bill rates, negative crude oil prices, record unemployment claims, a burgeoning budget deficit, widespread social unrest, an inverted yield curve, a surge in single-family home prices, a collapse in auto sales, a seize up of the treasury market, one of the fastest seventy-five percent stock market rebounds of all time, and the New England Patriots missing the NFL playoffs. Any one of these events would be newsworthy; we faced them all in the course of a single year.
Fortunately, Peak steadfastly navigated this minefield of challenges, leaving our clients to ask how we could anticipate the market’s response and what we learned once the dust settled. Introspection has always been part of our investment process and we again welcomed the exercise. In truth, it was not deviating from our investment process that spurred a successful outcome for our clients. We realize at times our commentaries sound redundant, since we regularly use this forum to discuss our core beliefs on portfolio management. Concepts such as proper diversification, discipline, theory-based portfolio construction, and the application of statistical concepts (e.g., mean reversion and cyclicality of asset classes) have all made regular appearances here. Further, we have highlighted our dedication to “controlling the controllable” when possible: slashing portfolio expenses, reducing turnover, and minimizing taxes. While not as glamourous, these actions materially improve our clients’ bottom lines.
We have consistently stressed the importance of filtering out the noise from pundits who specialize in entertainment rather than education; those who sensationalize market events for “clicks” rather than offer sensible, time-tested guidance. For us, times of stress such as 2020 provide us the opportunity to employ – in this case multiple times – one of our most important tools in the toolbox: systematic and opportunistic rebalancing. After a tremendous year in 2019, Peak rebalanced portfolios in January, trimming equities and buying underperforming assets such as bonds and precious metals. Then, we rebalanced again in March as we saw markets become severely dislocated, buying stocks at depressed prices and selling fixed income securities at elevated levels. From that point onward, we continued communicating what we interpreted as the true drivers behind the stock market’s historic rebound. This was to keep clients focused on the big picture, so as to not succumb to the overwhelmingly bearish narrative that persisted throughout the spring and summer.
These were the arrows in Peak’s quiver for managing 2020’s surprises. They are also the same tools we utilize at all times, not only the challenging ones. While many of these tenets seem obvious, their consistent application can be difficult to practice, especially under severe duress. However, our team’s resolve to follow Peak’s discipline-driven investment philosophy is resolute. Perhaps above all else, we fundamentally understand the perseverance of markets over time. Among other factors, this persistence is driven in part by humanity’s innate desire to innovate and the impact of inflation. We have often said that the stock market is undefeated, having vanquished every foe faced since the signing of the Buttonwood Agreement in 1792 (the formalization of securities trading on Wall Street). We still stand by that statement today. Undoubtedly there will be more selloffs, crashes, corrections, recessions, and possibly even, depressions. But our unwavering discipline and faith in both humanity’s and the market’s resilience over time will remain our guiding principle throughout them all.
As noted earlier, broad markets concluded the year at all-time highs and many asset classes enjoyed robust annual returns. While these returns are indeed noteworthy, we’d be remiss not to specifically highlight some of the impressive returns realized since the market bottomed on March 23rd. Maybe not so coincidentally, many of the top performing investments were the beneficiary of mean reversion and cyclicality. Simply defined, this is when an asset class that has lagged in performance for a period of time eventually transitions into a leader (and vice versa). In Peak’s effort to broadly diversify, client portfolios will inevitably hold investments that take on the mantle of laggard, thus patience is required for mean reversion to occur which ultimately moves these assets into the leading class. Waiting for this phenomenon to unfold can be challenging, especially when markets are persistently dominated by one particular cohort for the better part of a decade (think large-cap growth stocks since the Great Recession). As is often the case in life, patience was finally rewarded. Peak’s best performing assets since the COVID March 23rd bottom happened to be areas of the market that have lagged for several years.
Calling 2020 unusual is an understatement and we feel pleased and fortunate to have put together a solid year for our clients. However, these feelings are bittersweet given that one does not have to look far to see the widespread economic damage wrought by COVID-19. Still, our job is to play the best hand from whatever cards we are dealt. We accomplish this by providing pragmatic and thoughtful financial advice while consistently managing client portfolios with the tools and philosophy described above. This comprehensive approach to helping our clients achieve their financial goals will never change.
On a separate note, many clients have inquired about receiving their Peak quarterly reports electronically. We in fact have a fantastic client portal that can be accessed via the web and through an IOS/Android app – we know many of you already do so. There, in addition to detailed portfolio analytics, customizable performance reporting, and the ability to generate your own custom reports, you can access your Peak quarterly reports past and present. If you’d like access to the portal, please let us know and we’ll gladly assist you.
We’d like to extend a sincere thank you to all our clients for trusting us this past year and for the investment fortitude you displayed as the going got tough. Well done.
Peak Financial Management
Additional information, including management fees and expenses, is provided on our Form ADV Part 2, available upon request or at the SEC’s Investment Advisor Public Disclosure site, here. with any investment strategy, there is potential for profit as well as the possibility of loss. We do not guarantee any minimum level of investment performance or the success of any portfolio or investment strategy. All investments involve risk (the amount of which may vary significantly) and investment recommendations will not always be profitable. Past performance is not a guarantee of future results.