“One of the lessons of 2020 was the uselessness of the annual New Year’s ritual of market forecasting,” wrote Miller Value Partner’s founder Bill Miller in a recent letter to investors.
Miller offered the following insights in his letter:
- “We are in a bull market in stocks that began in March 2009 and that shows no sign of ending.”
- The “current state of the market,” he believes, is characterized by optimism and the belief that a “solid recovery is underway” that corporate profits will rise next year, inflation will remain low and the Fed will continue to provide liquidity and keep short-term rates low.
- Long-term rates may rise, but not enough to “derail the recovery.”
- The Fed will not implement “adverse” policy changes until the economy has reached full employment—which is not likely for another few years.
- Share valuations “look high and are high but are not as high as they look” considering the above observations.
- As the pandemic emerged last year, those companies that “would benefit from lockdowns and an accelerated shift to much greater online activity separated themselves from the broader market, a trend that continued until late August.” He added that since that time, a rotation to value has emerged.
- Miller agrees with the consensus view of optimism toward stocks and the “muted pessimism” toward bonds. He adds, however, that “where I think the consensus may be wrong is that 2021’s economic and profit growth could be considerably higher than is now priced into stocks and bonds,” leading some trailing sectors (i.e., financials and energy) to “move from laggards to leaders.”
- Miller believes the market may be “underestimating the risks of inflation,” noting that savings rates are unusually high and as the economy gains more normalcy toward the end of this year, “it is likely that consumption will accelerate” which, in turn, could fuel inflation.
- Regarding bitcoin, the “best performing asset category in 2020,” Miller argues that an uptick in inflation could lead more companies to “decide to diversify some small portion of their cash balances into bitcoin instead of cash” which could result in “the current relative trickle” into the cryptocurrency becoming a “torrent.” He cites Warren Buffett’s characterization of bitcoin as “rat poison,” concluding, “He may well be right. Bitcoin could be rat poison, and the rat could be cash.”