Help is on the Way
At long last we turn the page on one of the most tumultuous years in my lifetime. The House of Representatives voted to impeach the president for abuse of power in January. By March, cases of the coronavirus had been found in all 50 states. The stock market responded with one of the most dramatic drops in the last 40 years (-34% in 1987, -34% in 2002, -49% in 2008, and -34% in 2020). In June, millions protested in support of Black Lives Matter. The election in November felt as though it spanned three strained months. Now, an unprecedented movement is underway to overturn the popular and electoral college votes. Finally, beyond all common sense, the year closed with stock prices, measured by the S&P 500, up 3.8% for the month of December and up an eye opening 18.4% for the year. Amidst utter chaos, the stock market is evidently focused elsewhere.
We will probably never know the true disconnect between what was happening on Wall Street and what was happening on Main Street. This will likely become the work of analysts and scholars for some time. As the dust settles, and we turn toward what may unfold in 2021, there are a multitude of causes and outcomes for us to consider. Some we can clearly see, and others will surprise us.
On the positive side, there is a lot to support owning stocks. Vaccines by Pfizer-BioNTech, Moderna and AstraZeneca/Oxford are being administered and still others are in the pipeline. The stimulus already approved by Congress, with likely more to follow, will prove a stabilizer for the economy, likely all the way into 2022. Analyst earnings estimates project record earnings for the S&P 500, in the range of $170 per share. The Fed Funds rate is currently 0.25% and I would not expect interest rates to rise in a threatening way. The Fed’s Chair Jerome Powell, alongside Janet Yellen as Secretary of the Treasury, ought to give the markets comfort. Demand for stocks will be supported by the low rates which limit quality investment alternatives.
On the other hand, there is a lot that could be disruptive in owning stocks. As was the case in the response to the Financial Crisis, politicians now may use debt limits as a mechanism to foil attempts to rebuild the economy. The Federal budget deficit is expected to top 15% of GDP in 2020, and the total deficit now exceeds 100% of GDP, the highest level since WWII. Labor force growth is turning negative, and output per worker is declining, both ominous signs for future GDP growth. At some point, tax revenues will need to be found in order to begin to rein in the deficits, especially in light of low economic growth. If in fact interest rates do rise, they will suppress the market’s PE ratio, make the cost of doing business (owning homes, consumer credit) more expensive, and make financing the federal deficit more costly.
My expectations are that the markets will enjoy a more transparent and clearly policy based attitude from Washington with respect to foreign trade, environmental policy, public health and general support for the whole of the economy. I think some of the disparities in the economy that have been exacerbated by the pandemic will begin to be addressed. While I do think returns have been pulled forward to a certain extent, there are a range of opportunities in play such as electric vehicle technology, alternative and clean energy, ESG themed investment approaches, and continued work-from-home technologies. We are busy looking to incorporate these emerging themes into our portfolios.
Our basic work will not change in 2021. We will continue to put our energy into both leading-edge and time-tested investment management technique with the intent of making money owning quality equities. We will also focus on linking our investment management capabilities with your financial planning needs, to make sure your exposure to risk, asset allocation and future planning is appropriate.
While in many ways nothing has changed from a week ago when it was still 2020, in other ways everything has changed. No doubt 2021 will bring its share of unexpected events. It is our work to navigate and profit from them that will make the difference this time next year.
Happy New Year!
Bruce Hotaling, CFA
The views and opinions stated herein are those of Bruce Hotaling, are of this date, and are subject to change without notice. Information contained in this report was received from sources believed to be reliable, but accuracy is not guaranteed. Investments are subject to market risk, including the possibility of loss of principal. Past performance does not guarantee future results. The S & P500 is an unmanaged index of 500 widely held stocks. Investors cannot invest directly in an index. The PE ratio (price/earnings) is a common measure of relative stock valuation.