Q2 Market Update & Commentary

July 13, 2021

It is remarkable what coming out of a pandemic and getting back to a more “normal” life can do to the perception of time. Seemingly in the blink of an eye, the market just wrapped up the second quarter and is quickly sliding towards 2022.

The stock market, as measured by BSW’s stock benchmark, The MSCI All Country World Index, was up 7.18% in Q2 and is up 13.21% year-to-date through June. Bonds have struggled to keep up under inflationary worries, but are still in the black for the year – up 0.62%according to the Bloomberg Barclays 1-10yr Municipal Index.

As discussed in the blog post last month, inflation remains a worry, but neither the bond market nor stock market have signaled that higher consumer prices will be a lasting concern. The stock market has indeed surged, but even still, valuations in the U.S. have come off their recent peak because earnings have accelerated even faster.

In a world where almost all assets are moving higher, where are the deals? What is the angle? How do we, as investors, be smart?

These questions are indeed timeless in nature but seem more relevant now as we watch meme stocks fly, home prices surge, and cryptocurrency become the betting person’s action of choice. It could be said that the common denominator to all these developments is the massive increase in money supply. However, in my opinion, that was just the spark that lit the fire. The fuel keeping the fire burning is all around us, inexhaustible and builds on itself.

The fuel to unsustainable speculative prices lives within each of us in the form of emotions – fear, greed, and a sense of always needing to DO SOMETHING are the perpetrators.

We appear to be evolving into a species that cannot sit still, must have something to do; feels guilty if we are not checking something off a list. This is all well and good when you are talking consumerism, the potential for increased productivity (although not all actions are productive), and the advancement of concepts, products, and services.

When it comes to investing, sometimes the best action is to not take any action at all.

After researching this concept of inaction further, I found a white paper published in 2008 in the Journal of Economic Psychology by Ofer H. Azar; and referenced in this fascinating NY Times article: The Art of the Save, for Goalie and Investor.

Azar studied why economists and investors felt the need to always tinker. Turns out that our penchant for action may be rooted in the concept that if our actions turn out wrong, we can always say “we tried.” For instance, U.S. Fed governors can always say “they tried” to do something if their interest rate changes end up souring the economy. What Azar calls “action bias” also has to do with how one feels after acting versus standing pat.

The pandemic, in my opinion, only exacerbated the desire to act. Since we were all forced into various states of inaction with the likes of stay-at-home orders and social distancing, it seems only natural that the itch surfaced in other areas.

Connecting the dots goes something like this: More money in the system + more time on our hands + more desire to trade and gamble + fear of missing out + greed as assets rise in price = Higher and higher asset prices.

At the risk of sounding like I’m preaching, the rational, logical, smart thing to do right now seems to be to resist the urge to act.

Along those lines, it’s probably wise…not to get caught up in a bidding war for a home that is 30% higher in price than last year; not to be the last one holding the bag on GameStop stock; not to “invest” in the likes of Dogecoin because your friends did; not to hoard products for fear of higher prices at the store; not to buy a stock on Robinhood because a person on Twitter says so…not to take action before checking yourself.

At BSW, we are not immune to these emotions. People all around us have made money on crypto, homes, and trading stocks. The desire to DO SOMETHING is always present.

After much introspection, my wife and I last year took advantage of being newly anointed empty nesters and relocated to a local farm. It was a substantial lifestyle change, but the hard work and challenge of learning how to raise animals and grow our own food has been incredibly rewarding.

We are learning firsthand that the temptation when planting a garden, harvesting hay, or raising animals is to fidget. However, frequently disrupting the soil, over experimenting with soil nutrients, overfeeding animals, and checking in too much can often be detrimental to the desired outcome. We are learning that it is up to us, as stewards of the land and of our animals, to read the signs before acting.

At BSW we are attempting to read the signs across the markets in which we invest, and we like our current stance. Not all assets are sky high and frothy. We still like foreign and emerging stocks over U.S. stocks for the next year. We continue to think investing through an ESG lens offers compelling opportunities. Many of the ESG themes found in our strategies are big-wave, multi-decade movements that seem to be just now gaining a head of steam and have the potential to help build a better future.

As the NYT article referenced above alludes to, sometimes being still before shifting is more advantageous in the end. As stewards of your wealth, we are always attempting to analyze the risks versus expected returns. In that vein, BSW is currently satisfied with standing pat. Should certain signs and market triggers reveal themselves over the coming months, we have a predetermined plan to rebalance portfolios and take action for all the right reasons.

Thanks for reading and enjoy your summer.

Craig Seidler
Director of Public Investments