Sleeping Beauty’s castle

Sleeping Beauty’s castle

Dear Friends,

In the new year, we had hoped to put behind us the volatile political situation that has afflicted our country for the past several years. Unfortunately, the events of the past week have dashed those hopes. A violent attack on Congress has shaken many of our institutions. A few years ago, it would have been unfathomable to imagine an outgoing US president would encourage his supporters to march on the capitol. And this unimaginable thing too, has happened. We are struck this week, by the variety of friends and colleagues overseas who have expressed their incredulity and concern that such a thing might happen in the US. And yet it has.

The long-term vibrancy or malaise of every economy is underpinned by its legal institutions and politics. US institutions have been shaken this week, in a manner that will likely have long term implications. The world’s assessment of the US’s political stability and uniform application of rule of law have been dramatically undercut by remarkable images of a mob running amok through the US capitol. The near-term impact will likely be contained by the almost uniform condemnation of the actions that led up to the sacking of the Capitol buildings. Underscoring the seriousness, almost every business lobby immediately condemned the actions of the mob, and the politicians who incited them. This includes the staid National Association of Manufacturers.

As with virtually all the dramatic political events of the past few years, the market seems to have shrugged the past week off. Major US indices remain at or near all time highs, seemingly oblivious to the impact of the on-going public health crisis and the significant impact it has had on much of the global economy. Many long term investors see the vast disconnect between the underlying economy and the markets and wonder: how long can this last?

In the fairy tale Sleeping Beauty, an entire realm is enchanted and frozen in place when the princess falls asleep. The cook was arguing with one of his assistants before the enchantment and is about to strike him. When the princess awakens, the very first sound is that of the cook slapping his assistant.

In similar ways, the US economy and large swaths of the global economy have been frozen in time, seemingly enchanted by the actions taken by governments and central banks around the world to alleviate the public health impacts. The Federal Reserve has conjured its own spells all year, conducting large asset purchases and hinting at a long period of zero or near-zero interest rates. Stock market investors have participated wholeheartedly in this enchantment, driving many stocks well into bubble territory.

Just as in Sleeping Beauty’s realm, we expect we will all wake up one day, a day like any other, with a slap in the face and this historic bull market for stocks will come to an end. Given the heady heights this market has reached, the long road down is likely to be unforgivingly treacherous. We recommend equity investors maintain caution as the new year gets underway. We cannot say when exactly this bull-market will end, but several indicators, the amount of new issuance, the extreme euphoric rise of the past few months, underlying economic conditions and nosebleed valuations are all signals that have presaged the biggest changes in momentum during past market bubbles. Though much of the market is extremely overvalued, as usually happens at the tail end of a bull market, there are some attractive opportunities in stocks at the value end of the spectrum. The renewable energy/cleantech sector, after having a break-out year in 2020, still has some compelling opportunities for long term investors. We also view the long-term prospects of many emerging markets positively, and the valuations in these markets are not nearly as extreme.

For bond investors, this year has capped several years of very low yields, and an interest rate policy that is bent on driving investors towards riskier assets. We believe investors should continue to maintain allocations to high-quality short and medium term bonds, despite the limited return they offer. Exposure to speculative or longer-dated bonds should be reviewed for appropriateness, since these issues can be volatile when interest rates or perceptions of risk change.

Though we are not yet past all the public health dangers, we fully expect that this difficult period for our country and the world will come to an end soon, and we will finally turn the page on the difficult year we have had. During these challenging times, we wish you and your families health and peace of mind.

Please let us know if you’d like to discuss any of the above in more detail.


Subir Grewal, CFA Louis Berger

The foregoing contents reflect the opinions of Washington Square Capital Management and are subject to change at any time without notice. Content provided herein is for informational purposes only and should not be used or constructed as investment advice or a recommendation regarding the purchase or sale of any security. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct. 

Post performance may not be indicative of future results. Indices are not available for direct investment. Any investor who attempts to mimic the performance of an index would incur fees and expenses which would reduce returns. Securities investing involves risk, including the potential for loss of principal. There is no assurance that any investment plan or strategy will be successful.

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