Eureka Wealth Solutions January 2021

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Quote Of The Month

Invention is the root of our success.  We’ve done crazy things together, and then made them normal.

-- Jeff Bezos on giving up the CEO’s job at Amazon

Economic Highlights

  • The COVID-19 vaccinations continue, and economists expect acceleration of economic recovery in second half of the year.

  • Real GDP grew 4.0% in Q4 from the previous quarter.

  • Retail sales for the 2020 Holiday season jumped 8.3% YoY despite the pandemic.

  • Job gains have been limited but expected to improve with more vaccinations and the new stimulus package from Congress.

  • Q4 corporate earnings have been broadly beating expectations so far in the reporting season.


Market Highlights

  • US Equities started the year in a rally mode but gave up their gains later in January, and S&P 500 Index closed down -1.0%.

  • Foreign Developed Markets also dropped -1.1%, but Emerging Markets led all equities, up 3.1%.

  • US high-grade bonds added up -0.7%, while the high yield eked out a gain of 0.3%. Foreign bonds were down across the board, with high-grade and high-yield bonds down -0.8% and -0.2%, respectively, but Emerging Markets bonds managed a 0.2% gain.

  • Commodities were another bright spot, up 2.6%, helped by another big move in oil, up 7.5%, while gold lost -2.7%.

  • US Dollar added 0.7%, rebounding for a recent slide.


Observations and Expectations

2021 jumped out of the gate where 2020 left off, but started showing signs of fatigue towards the end of January.  Whether it’s due to high valuations in parts of the market or sell-the-news mentality after the change in the White House, market consolidation seems to be in the works.  Consolidations as well as corrections are inevitable and healthy parts of market cycles, we keep reminding readers.  The long-term trend remains bullish, but market may be vulnerable in the short term.

Looking forward to February, we continue to watch the earnings reports and the corporate outlook.  Some have seemed almost too good to be true, but certain names have been punished just if a company’s growth target for the coming year fell short of investors’ expectations.  We’re also watching for the new legislation and policy proposals coming out from the new White House administration and their impact on various industries.  Some hopeful expectations have lifted several industries ranging from electric vehicles to cannabis to hefty new highs.

Which brings us back to the point about the short-term market dangers.  It’s well known that the last stage of the bull market before pullback – or worse – is euphoria.  While that state is hard to define precisely, many signs can remind us of the past market tops such as very high valuations in certain parts of the market, high retail investing activity and many speculative investment opportunities.

The latter is also fueling an unusually strong new issue market, whether traditional IPOs, via direct listing or through a SPAC, the latest market fad.  Each cycle, however, brings something new with it.  Here are some of the new signs of a market top:

  • A bunch of day traders driving up GameStop stock 100 times in a year (and 10-fold in a week)

  • A new SPAC run by Colin Kaepernick raising over a billion dollars

  • Bitcoin approaching $50,000

  • An ETF launching with ticker DUDE

We continue to evaluate opportunities in several promising industries and recovering sectors, while taking profits in some high flyers and hedging overall risk.

Sector Update

Consumer Discretionary are typically the last bastion of defense against economic maladies. It is perhaps no wonder that surging bull market is leaving the sector behind at the moment. It was a crowded trade back in March and April of 2020, and It still provides that nice shelter from the storm that may be brewing on the horizon.

Communication Services sector is the most recent addition to the S&P line-up, broken out of the Technology sector two years ago. And over the past year it was close 3rd in performance, behind only roaring Technology and resurging Consumer Discretionary.  In addition to some of the familiar technology giants like Google, Facebook and Netflix, the sector includes telecom providers, media and entertainment companies that are both beneficiaries of the work-from-home economy and stable subscription earnings.

Impact Investing themes are breaking out everywhere in the market. The hopes of Biden administration’s far-reaching green initiatives are driving many previously unknown companies to rich valuations. All alternative energy – not just solar, smart city, electric vehicles, energy storage, and green infrastructure companies are enjoying their time in the sun, sorry for the pun.

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Question of the Month

This is where we answer the best investment question we’ve heard all month. If you’d like your question to be considered, please send it to us.


What’s more important in portfolio construction: growth or risk, concentration or diversification?
[This is a reprint from 2019, but it’s an evergreen question]


From time to time, we get questions about our asset allocation process.  After all, it’s a fundamental building block that your actual portfolio will be constructed on top of.  And while each portfolio is different, the principles on which they’re built are the same.  Yet the answer to the question above is not cut and dry.  The answer is, as with most things in investing and perhaps in life, it depends.

Growth vs. Risk.  With extremely rare exceptions, you can’t have one without the other.  The modern portfolio theory states that you can expect the two to go hand in hand.  On one end of the spectrum, you’d have very safe assets like savings account deposits that offer predefined low growth.  On the other, you have small-cap emerging markets stocks with high potential upside but also a risk to lose essentially your entire premium.

We start the process by determining your risk tolerance and investment horizon.  It deserves an entire discussion on its own; we’ll just say that it’s an inexact science and needs to be constantly monitored.  But once the original level is determined, it is matched to a spot on the security market line (see the graph above).  The actual portfolio selections may have higher or lower risk and expected reward, but their weighted average should be at that risk level.

Concentration vs. Diversification.  The conventional wisdom says that diversification reduces overall portfolio risk.  It is also likely to reduce your potential reward.  If you identified the Internet as the emerging mega-trend in mid-to-late 90’s, you could’ve conceivably done pretty well by investing into an ETF or a basket of Internet stocks.  Some of them went under, some were acquired and some returned hundreds of times on the invested capital.

Picking a single stock from that group would have a rather binary outcome instead.  If you picked well and put all your money into Amazon stock, you would probably not be reading this newsletter today.  In a quite different scenario, a B2B company called PurchasePro was hot for a while until the entire management went to jail for fraud and the company was liquidated.  So, if you put all your money into it instead of Amazon, you would have probably lost it all.

A newer school of thought suggests that an overly diversified portfolio that many mutual funds carry, for example, contains only a few top outperforming ideas of the portfolio manager, but the bulk of it brings the average down and therefore increases the risk of the portfolio.  We generally prefer to identify narrow themes and trends and build a basket around it to be applied to the overall portfolio.  However, picking only a few “best of the breed” ideas within the theme is certainly another way to go for a concentrated portfolio.  Andrew Carnegie definitely knew a thing or two about building wealth and had a strong opinion about it.

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The materials presented above serve informational purpose only and do not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities. The author, Eureka Wealth Solutions, LLC, and/or its clients may hold positions in the ETFs, and/or any investment assets mentioned above. Folio portfolios that may be presented are created by Eureka Wealth Solutions, LLC, and are available for purchase through Folio site.  Indices and trademarks are the property of their respective owners.  There are risks involved in investing including possible loss of principal.  Performance results of individual securities and portfolios are not indicative of overall client account performances. Past performance does not guarantee future results.
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