After coming off the greatest rebound in stock market history, just about every investor seems to be back on top again. From the depths of despair in late March 2020 to the high on the mountaintop in December 2020, the investment environment on Wall Street is … full steam ahead. As you can see in Exhibit 1 all stock market averages were up last year. Some more than others, but obviously the NASDAQ Composite led the pack, because that’s where the highflyers were.

One dominant observation: Practically every investor is doing the same thing … same stocks, same indexes, same allocation. Hence the name of the old song, “The Hokey Pokey,” which implies that everyone is doing the same thing all at the same time. This brings to mind some other times in history when investors were also doing the same thing.

For example, in the early 1980s investors bought every small oil and gas stock that traded. Then in 1990 they bought full force into Japan (the NIKKEI Index is still -30% below its January 1990 level). In 1999–2000 tech stocks were all the rage. In our January 2000 Market Comments, with the NASDAQ up some 85%, we said investor mood was that there was no end in sight. (What happened? The NASDAQ market fell -77% into October 2002.) Then there was the housing and condo craze of 2006–07, an era of so-called free money and risky mortgages. Once again, virtually everyone was doing the same thing.

Let’s emphasize straight away that we at Oxbow Advisors own stocks in both growth and dividend varieties. But our managed portfolios are balanced with some cash and other income vehicles as well. It’s imperative to maintain balance, and that means also having some liquidity.

The Public Is Back …

Here are several examples of what we’ve witnessed over the last few months.

• A 15-year-old high school sophomore trading stocks and enjoying it.

• No fewer than six people we know of who now day-trade instead of working at a “real” job.

• A set of home movers who trade on Robinhood.

• Three college students who trade stocks between studies.

• Last but not least, an inquiry by a nephew who is in real estate that maybe he should use all his funds to buy NIO Inc., an electric car maker with no profit.

To get a better feel for all this, look at Exhibit 2 showing the number of yearly IPOs since 2000; 2020 was a record year.

Bonds, Bonds: Where to from Here …?

As most of our investors at Oxbow know, we have been a large buyer of bonds over the last 15 years, with maturities ranging from one year to 20 years. This has proven to be good for our investors. With the Federal Reserve now buying almost everything in sight, it has made bonds a tough trade. Exhibit 3 shows the effects of inflation on current bond prices.

This is the problem within the current investment environment … If you are receiving less than 1% in interest on a 10-year U.S. Treasury bond and the inflation rate (CPI) is 1.6%, you are losing ground and your buying power is eroding. The so-called “Financial Planners and Wealth Advisors” still continue their ongoing party line of just buy the bond funds. The problem with this is that new purchases of bonds carry more risk with little return. The average age of portfolio managers in the U.S. is 49, and they have never seen rising interest rates. At Oxbow we have all ages of money managers, ranging from 30 to 70 years. A few, including Ted Oakley, Bob Walsh, Rusty Pierce and Dana Croswhite, have seen inflation trend higher. We are preparing to combat potential rising inflation by currently adding positions in U.S. Treasury inflation bonds (TIPs as they’re called). We’re also starting to add some other income items, including high-yielding preferred stocks and a limited number of foreign investments, to our bond portfolios. The reason is that those items are less risky than some bonds. In addition, it’s the only place to get a real return. This brings up the following question …

If Inflation Is Returning, What About Commodities?

It has been a long time since commodities have performed well. In fact, it has been so long that most investors have written them off for good. We can understand people wanting to get on the “green bandwagon,” and we also appreciate the need to take care of our country’s resources. Nevertheless, commodities consist of many products used in everyday life. Notice Exhibit 4 shows the ratio of commodity prices to the stock market prices since 1970.

Maybe it’s time for a change? Our friend Bart Starr Jr. of McVean Trading & Investments Inc. runs commodity accounts. We discussed that the odds are quite high for better returns in commodity prices. This would go hand in hand with the trend of somewhat higher interest rates. (This is an area, from an investment standpoint, we will be pursuing this new year.) Commodities that fall into this category include timber, oil, grains, metals, food and materials. Currently on Wall Street there’s a major standoff between people who think inflation (commodities) is returning and those who think disinflation is here for a long time.

We Didn’t See This One Coming …

Looking back, as we entered 2020 the price per barrel of crude oil was $60, but still well below the 2013–14 price of $100. In the Oxbow stock accounts, we had no exposure to oil and gas, but in high-income-oriented portfolios we did own some select gas-pipeline companies due to their high-yielding cash flow. When the pandemic hit, it was like a natural disaster. As those who have been through major hurricanes, we can tell you firsthand that everything stops. For a while in 2020 everything, including travel, nearly stopped. Notice Exhibit 5 shows crude oil prices going from $60 to zero and below.

This severe price decline was unprecedented and caught virtually everyone by surprise. It was a disaster for energy companies. Most oil and gas stock prices fell -75% or more from their highs. Oxbow made some changes to upgrade quality in portfolios, but a sell-off of this magnitude took a major toll. Our current holdings still include some gas pipelines, producers, and royalty companies. Fortunately, they recently have rebounded nicely and still pay attractive dividends.

How to Invest Now?

This question is on everyone’s mind. Where to invest and have some semblance of peace of mind. Interest rates are low, and stock markets are extended. Add to that a new administration, and the questions keep coming. The U.S. Congress, as well as the U.S. Treasury/Federal Reserve monetary policies, have probably gone too far to turn back. With government debt at almost $28 trillion and the 2020 budget deficit at $4 trillion, more and more aid and spending are still to come. This means you have to look out for yourself as an investor! More than likely, the dollar will continue to decline as a fiat currency. Investors have to be vigilant and watch for creeping inflation. It isn’t here yet, but it needs to be on your radar.

Oxbow still owns stocks but, as we stated earlier, we are balanced. More than likely 2021 will be another unusual year and impossible to predict. Our ongoing investment approach is to create high cash flow within our high-income accounts, own good growth companies, and have safety with our conservative fixed-income and cash.

Stocks are clearly overextended now, and there appears to be a lot of novice investors who know very little about what they’re doing. Consequently, our advice is to lower your sights a little so as to be somewhat safer. Don’t go to all cash, but have balance in what you own. As the new year starts, don’t be surprised if volatility picks up.

In the movie “Groundhog Day,” Bill Murray wakes up to the same day with nothing changing. The year 2020 seemed a bit like that movie with nearly everyone still doing the same thing (think “Hokey Pokey”) since last March. All things considered, there are reasons to be optimistic as we enter the new year. Thank you for continuing to have confidence in Oxbow.

Ted Oakley

Bob Walsh