Dear Friends and Clients,

It’s a new year! We are excited to, hopefully, be moving on from all that ailed us over the last year and imagine you are too.

2020 was a very strange year in which we experienced a global pandemic and recession yet saw investment portfolio balances grow. Here are the performance results for various investments in the fourth quarter and full year:

Source: Orion


As you can see, every major asset class delivered positive returns in 2020. While this is welcomed, we think it’s important to understand why this was the case, if it might continue, and consider risks the market may be overlooking.

When we assess our current set of investment indicators, we see a mixed bag. We have two positive, one neutral, and two negative indicators. One of the negatives is our valuation indicator. This measures how expensive stocks are compared to history. We recently surpassed the previous valuation high of 1999, meaning stocks are historically expensive. Given ‘99 was around the top of the dot com bubble and the market subsequently declined around 50% (source: Yahoo Finance), it sends our antennae up in search of other existing similarities. While we are currently partaking in the stock market party, we want to be careful not to overstay our welcome.

There are a couple market characteristics that are reminiscent of the last time valuations were this high, but also one important difference. One thing that came roaring back in 2020 was the rise of the day trader. Whether it was a combination of people having more free time, excess cash, or a lack of places to gamble, the number of individuals trading in mostly speculative stocks exploded last year. Playing with stocks is fun and easy… as long as they keep going up. As was the case after the ‘90s day trading bonanza, we think many first-time traders buying hot stocks will eventually receive a valuable, albeit expensive, lesson in prudent investing.

The other resemblance is the number and makeup of companies being listed on stock exchanges though IPOs (initial public offerings). In the tech boom, any company listing as publicly traded stock with a “.com” at the end of their name would see a flood of demand pushing up their stock price. This time around, words like “Cloud”, “EV” (electric vehicles), “Therapeutics”, and “Technologies” are igniting the same kind of rush. Additionally, like in ‘99, a lot of these new companies don’t have much in the way of revenues or earnings.

However, while both parallels give us pause, there is one significant factor leading us to believe the party may continue. During the valuation peak at the end of the last millennium, interest rates were meaningfully higher than they are now. One could have sold stocks, parked money in cash equivalents, and still earned more than 5%. That was a much more attractive proposition than today’s yields of around 0%. This suggests to us that the high valuations of today seem more reasonable than they were back then and may stay at elevated levels if there are no attractive alternatives (i.e., interest rates stay low).

This could be said of every asset from stocks, to real estate, to gold. As you can see in the charts below, the prices of each have directly benefited from declining interest rates (Public Service Announcement: If you haven’t investigated refinancing your mortgage in the last year, now might be a good time!).

Since the Federal Reserve controls short-term interest rates and influences other rates, we are keeping a close eye on their actions. Any change in desire to keep rates low would effectively be like taking away the punchbowl.

In conclusion, we are heading into the new year cautiously optimistic. If the pandemic subsides and economy improves as expected, there’s a chance we will see some of the more economically-sensitive stocks outperform the winners of last year. We currently have portfolios tilted to take advantage of this rotation via exposure to small cap stocks and an overweight of value vs. growth.

As always, if you have any questions or would like to dive deeper into your portfolio, please don’t hesitate to reach out.


Wishing you health and happiness in 2021,


Mike Gallagher and the TPG Investment Committee