Date: June 8, 2021

***Q1 Client Update***

Many people like to read my very brief quarterly client update which I select excerpts. If you’re one of them, please read on. If not, feel free to delete now. Always happy to hear comments and questions.

Although the light at the end of the proverbial tunnel has been shining since late last year, it certainly got brighter in Q1 of 2021 as more and more Americans got vaccinated and the economy continued to reopen. That’s where I am going to begin. Although we have gotten used to society’s “new normal”, the first quarter of 2021 began to shed light on how life is going to look as we get to the other side of the pandemic.

First, we all know that there is epic pent up demand to get out, to visit with friends and family, to shop, to eat and to travel. That comes as a surprise to no one. While I started booking travel for 2021 almost a year ago to take advantage of rock bottom prices, I find myself doubling and tripling my scheduled trips for 2021 and 2022 as it feels like life is starting to normalize. Extrapolate that to more than 300 million people and it’s no stretch to say that the economy will continue to boom.

As I discussed in my 2021 Fearless Forecast, I thought the economy could see its strongest growth since Clinton or Reagan. That wasn’t hard to forecast after seeing the historic surge in Q3 2020 and the release of the vaccines in Q4 which I said was as or more important from an economic standpoint than the Fed’s tsunami of liquidity or Congress’ unfathomable response. Although we will not get a first look at Q1 GDP growth until after this is published, it is going to be very strong.

Let’s not stop there. Corporate earnings were massive in Q1, both in absolute and relative terms. Comparing anything to Q1 2020 is unfair since the world was falling off a cliff then. However, even as analysts raised and raised again their estimates, companies were poised to beat expectations. And comparisons to Q2 2020 will be laughable as the heart of the economic collapse was taking place.

Although Q1 2021 felt on the quiet side I think that’s only the case because the majority of the news was either positive, like earnings and economic growth, or non-market moving. 2021 began with new strains of COVID found around the world, a theme that is unlikely to change with so many millions or even billions not vaccinated.

The runoff for Senate seats in Georgia came next and I thought this had the potential to be a market mover for more than just a week or so. Once a solidly red state, the notion that both seats could turn blue and create a 50-50 tie in the U.S. Senate was historically unthinkable. But it happened and the markets did not seem to mind as they weighed the possibility of sharply higher taxes against additional massive stimulus. The Capitol insurrection followed shortly thereafter and I can only describe the events as unimaginable. It felt like I was watching something from a movie or a third world country. And just like we saw with the Georgia Senate race, the markets were basically nonplussed. Whether you have been reading my work for a few months or 30 years, you know that I firmly believe it isn’t what the news actually is, but rather, how markets react. 2021 was only a week old with two major news events and all the bears could muster was a very mild and brief selloff. That spoke volumes about what was about to come.

As a result of the events at the Capitol, the social media powers banned President Trump from their platforms. While non-impactful, I found this to be one of the most fascinating corporate moves in recent memory, booting the sitting U.S. president from social media. Impeachment 2.0 was quickly cobbled together as President-Elect Biden was preparing to take office. The Senate’s trial after Biden was officially inaugurated as the 46th President did nothing to shake the confidence of Americans.

Johnson & Johnson released vaccine number three during the first month of 2021 and yours truly was one of the first to receive it in Connecticut. The new administration and Congress learned from the mistakes of the Obama regime and quickly passed a $1.8 trillion stimulus bill, sold as COVID relief, even though hundreds of billions were left unspent by the Trump administration. Before the ink was even dry on the legislation, a multi-trillion dollar infrastructure plan was floated. Infrastructure is one of the few areas where there is bipartisan support for action as few can argue the nation’s roads, bridges and tunnels are in dire need of repair and upgrade. Only the size of the plan will be up for debate, and rigorous debate there will be.

Turning to market events, Q1 certainly had its share. Many times, I wrote about and created videos on the goings on of the Gamestop saga where the supposed army of small, mom and pop Reddit traders forced vertical moves in a handful of stocks like Gamestop and AMC. In turn, Melvin Capital, a major hedge fund player with ties to masters of the universe, Ken Griffin and Steve Cohen, needed a bailout as Melvin was positioned for Gamestop et al to go down. To pour fuel on the crisis, Robinhood and other trading platforms restricted trading in these hyperbolic stocks at the same time as Robinhood’s largest client, Mr. Griffin’s Citadel Securities, was infusing billions of dollars into Melvin to help save the firm.

You knew things were egregiously wrong in the market when Senators Warren and Cruz ended up on the same side of the issue. Congressional hearings soon followed, and the country learned many Wall Street secrets about disclosure and an uneven playing field for the billion dollar hedge funds. And just when you thought it was safe to go back in the water and Wall Street was cleaning up its act again, we learned about another firm blow up. This time not only had almost no one heard of the firm, but few could pronounce its name properly, Archegos. When the tide went out, the investing community was horrified at Wall Street’s complete and utter ignorance at how one single man pulled the wool over 7 major firms with pre-financial crisis leverage and hubris.

Events like Gamestop and Archegos do not happen easily nor in any market environment. It takes years for confidence, greed and euphoria to sufficiently build. The epic greed and euphoria I started writing about shortly after the election continued straight through to the end of Q1. When the media asked me where I saw it, I laughed and asked where do you not see it?

Marijuana stocks surged by 50% in Q1. Bitcoin soared by more than 100%. Those made the mid-single digit returns in the major stock market indices look paltry. Even energy’s big rally paled in comparison to what went on in the riskiest sectors. Special Purpose Acquisition Companies (SPACs) which are essentially blank check vehicles saw more money flow in during January than in their history combined. At the same time, usually safe havens like gold and treasury bonds fell 10% and 3% respectively. In short, the riskier the investment, the better it did overall in Q1.

What was behind the economic surge and stock market’s blistering pace? As I mentioned before, the vaccines may have been the single greatest contributor, but it was more, much more. The Fed continued its historic and unprecedented support for the credit markets as well as its unfathomable amount of money printing which has a direct and positive relationship with stock prices. Not to be outdone, Congress has spent more and taken on more debt than in any time in history. A $30 trillion national debt is coming to a theater near you very soon. I think most can agree that it is fiscally impossible to ever pay back what the country has borrowed. At some point, there will be the greatest workout in the history of mankind. But that is a topic for a different time.

I have always written that you never want to fight with the guy who owns the money printing presses. I just want to sell him ink. It has been such an enjoyable run since March 23, 2020, but really, since Halloween. The Fed knows how powerful the wealth effect is. That is why they target the markets, first and foremost, and not Main Street. Jay Powell & Company are not going to stop what they are doing until well after it’s too late. They wanted more risk taking. They wanted higher stock prices. They wanted to engineer inflation. They got it all. Now they better be careful what they wished for.

Q1 2021 was relatively easy in the financial markets. Most securities went up, stocks, high yield bonds, commodities, cryptocurrencies and real estate. There was no significant bout of weakness. I do not sense that Q2 will be as accommodating. As you know, I have been targeting the period of May 1 through September 1 for a stock market peak to form with a 10%+ correction to follow. Q2 opens that window. If the stock market’s foundation continues to be as strong as it has, the decline should be limited, short-lived and one to aggressively buy for another run to all-time highs. However, if participation wanes at new highs or the high yield bond market rolls over with stocks still rallying, I will become more concerned. Additionally, if “risk on” sectors, like banks, transports, energy and technology cede leadership to defensive ones like consumer staples and utilities, I won’t be as sanguine.

Please do not get me wrong nor misconstrue my message. The bull market is only one year old. The economic expansion is even younger. Neither should come to an end this year, just some bumps and bruises along the way. After my long-standing target of Dow 30,000 was met late last year, our model called for 33,000 to be next and then 36,000. The percent moves are getting smaller and it won’t be as easy to achieve, but they are still moving higher and the economy should grow strongly in Q2 with huge corporate earnings.

At this point in the report, I usually write about my barbell strategy to investing. If you picture a barbell from the gym, there is a long, thin bar with big weights on both ends. Think of those weights as our conservative strategies and aggressive ones, the exact proportions do not matter yet. In theory, your money would have higher weights to conservative and aggressive strategies, especially if you are in or very close to retirement, and lower allocations to the middle of the road strategies. This barbell approach has also worked very well with monies being transferred in from 401K and 403b plans as those pre-packaged plans rely heavily on bonds for the more conservative approach and do not account for interest rates rising. Additionally, their aggressive choices do not usually reward the risk taken.

Anyway, even though I did just write about it again, I have not moved client money into the barbell for over a year. That is because our middle of the barbell strategies have been performing at such a high level. I want to give them a chance to plateau before moving more money to the barbell. If you would like to learn more about the barbell approach, we can set up a call, Skype or Zoom.

Here is the link to our disclosure documents including our privacy policy as well as our ADV Part 2A & 2B.

According to SEC and state regulations Heritage Capital, LLC will deliver Form ADV Part 2 to all clients within 60 days of its annual amendment filing date. Additionally, we may engage unaffiliated investment advisers as sub advisers to assist us with management of client assets. Our services under the investment advisory contract do not include financial planning.

Past performance may not be indicative of future results. The above individual account performance information reflects the reinvestment of dividends, and is net of applicable transaction fees, Heritage Capital’s investment management fee (if debited directly from the account), and any other related account expenses. Account information has been compiled solely by Heritage Capital, has not been independently verified, and does not reflect the impact of taxes on non-qualified accounts. In preparing this report, Heritage Capital has relied upon information provided by the account custodian. Please refer to formal tax documents received from the account custodian for cost basis and tax reporting purposes. Please remember to contact Heritage Capital,in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you want to impose, add, or modify any reasonable restrictions to our investment advisory services. Please Note: Unless you advise, in writing, to the contrary, we will assume that there are no restrictions on our services, other than to manage the account in accordance with your designated investment objective. Please Also Note: Please compare this statement with account statements received from the account custodian. The account custodian does verify the accuracy of the advisory fee calculation. A copy of our current written disclosure statement discussing our advisory services and fees continues to remain available upon request.

From a health standpoint as well as a financial market and economic one, the global pandemic is abating and seems to be in the final innings in the U.S. The U.S. economy should experience very strong growth in 2021, but specifically in Q1 and Q2. There is a reason the stock market has been rallying like it has since October 30. Q1 and Q2 will see the easiest comparisons to the prior year of perhaps the modern investing era. The economic trifecta of mass vaccinations, the Fed and government support are like nothing the country has ever seen. Everything feels like the gift that keeps on giving. There will be a reckoning, but I do not believe the big one is coming in Q2 nor 2021.

Our strategies have done remarkably well, and I cannot appropriately articulate how blessed and fortunate I am to have such a loyal, supportive and intelligent client base. You listened well during the COVID crash and then stayed the course or increased risk when it was time. There are many new clients to welcome and I always promise to never sacrifice the tenets and mission of this firm.

Although we have only been meeting via Skype, Zoom and the phone since March 2020, that is changing as I type this, and virtual meetings will always be available if you prefer. Please continue to share your feedback, positive and negative. Investing is a marathon not a sprint and the long-term future continues to look very, very bright. We look forward to sharing that with you over the coming years. Again, here is the link to my calendar to schedule a call, Zoom meeting or Skype with in person coming shortly.

Thank you for the privilege of serving as your investment adviser!


Paul Schatz, President, Heritage Capital