2020, to say the least, was a tumultuous year on many fronts. With the election cycle behind us, a new administration in place and a light at the end of the Covid tunnel, our base case assumes 2021 will be prone to the fits and starts of the early cycle stages, yet overall be a smoother year in terms of investment markets and life in general.

2021 Strategy: A Tactical Pivot

Over the years we have opined our preference to hold more actively managed funds in later-stage economic cycles and more passive funds in early-stage economic cycles. While we don’t yet have the data to know if we are officially out of recession, we believe 2020 was the turning point from late-stage cycle to early-stage and as such we are beginning the transition from mostly active to more passive funds and ETFs.

We plan to maintain exposure to active managers in asset classes where we believe those managers can add value over their passively managed peers: Emerging markets, small cap and alternative markets. We are also taking steps to reduce exposure to low return assets such as cash and short term bonds, and increase exposure to tactical positions that align with early market cycle return expectations.

Throughout Buttonwood’s history as an independent firm, we have been fortunate to have ongoing dialog about investment strategy with some of the best minds in our industry; JP Morgan, Vanguard, BlackRock and many others. We believe the breadth of knowledge we have derived from these relationships has helped us successfully develop and deliver our strategy.

In an ever-evolving and more complex investment universe, we will continue to leverage our partnerships with the intent to increase our efficiency and nimbleness as an Investment Policy Committee. We plan to continue to utilize powerful technology platforms to analyze investments, evaluate risk exposures and manage allocations.

And as we move forward into what we believe is the start of a new economic cycle, we plan to continue our shift toward additional targeted risk exposures, through both sector and factor specific strategies, we believe we can better take advantage of changing market conditions and ultimately continue to produce the coveted outcome of a more consistent rate of return over full economic cycles.

Today, our base case is built around an equally divided, gridlocked government providing opportunity for continued stock market growth. We believe this growth is likely to be propelled by a dovish Fed, additional stimulus as well as a delay in tax increases and/or significant policy changes until Covid is materially addressed.

As the vaccine rollout continues and restrictions on public events and travel lessen in 2021, we believe there is an opportunistic tailwind for economic expansion. We also believe Environmental Social & Governance (ESG) investing will likely come into favor under the current administration and we will plan to add exposure in this area.

Risks abound

We consider both sides of many arguments when determining our base case for investment allocation. While our base remains optimistic, as always, there are a number of potential challenges our economy and the markets must overcome. Covid cases show no sign of slowing and many comments focused around market ‘bubbles’ exist. It is true that valuations are high and if future earnings don’t live up to current expectations, there is a real possibility for a downturn in the markets.

Unemployment remains an issue and the likelihood of ‘mom & pop’ shops/restaurants returning to a prospering condition are unknown. Additional stimulus could also have longer-term unforeseen effects on the economy as tax rates will almost assuredly increase to help reduce the national debt.

You can expect ongoing reports of our positioning and should you have specific questions about our strategy, please let us know and we will make sure to review details at our next meeting. And while we don’t recommend fixating on short term market fluctuations, if you would like to check specific performance of your investments across all your accounts, our Buttonwood Portal is available 24/7. Or you can contact us and we can provide reports specific to your questions and financial life.

Thank you for your continued trust and allowing us to serve as your Family CFO!