April 10, 2021
Whew! March 2020 seems like a lifetime ago! We had just started on this COVID induced adventure. It’s turned out to be a series of personal, political, economic, and medical twists and turns. Hopefully, we’re getting a handle on the pandemic and can look forward to a more stable (normal) time period.
We had the deepest and quickest economic contraction at least since World War II. Now it appears we may post the best economic growth spurt in my lifetime. Of course, this will not be a straight line, but the promise is certainly there to make such a prediction.
Here’s a T-Chart with some of the pluses and minuses:
|The current pace of COVID-19 vaccinations is providing significant support for the economy.||Vaccine hesitancy and the COVID-19 variants risk stalling or at least slowing businesses reopening and leisure travel.|
|The labor market has made some steps toward recovery with almost 1 million jobs added last month.||However, there are still about 8.4 million less people employed than a year ago.|
|The Federal Reserve Bank has effectively gone all in to keep the economy in recovery mode.||Its balance sheet has increased substantially. How will that impact the economy longer term?|
|Interest rates will remain at extremely low levels supporting economic activity and asset values of all kinds.||Someday, interest rates and asset values will return to a more typical relationship. Will this be a smooth adjustment?|
|In the short term, inflation is going to be higher than we’ve been used to. For now, this transient inflation is related to pandemic related supply disruptions.||However, if it’s permanent due to monetary and fiscal policy actions, inflation will add another layer of complexity to the recovery.|
|The various stimulus/economic support payments have had a very positive impact on the overall economy.||What happens as these payments come to an end?|
For equity investors, the past twelve months turned out to be a ‘rainbow’ year. I don’t think anyone would have predicted the kind of equity returns we’ve seen, at least so quickly. On the other hand, you do have to remember how bad March 2020 actually was!
I believe I said last year not to get overly concerned about one month’s investment returns. This year, I would make the same comment – do not expect the recent returns to be a “new” normal.
As a reminder, Vanguard’s most recent outlook suggests US Equity returns of 3% to 5% going forward and bond returns to be in the 0.8% to 1.8% range. They also suggest the median volatility for US Equities to be around 16.9%. In essence, that means the stock market return could range from +21.9% to -11.9%. This could be a pretty wild ride.
Last summer, the prognosticators were giving us an alphabet soup of options for an economic recovery. At this point, I’m sticking with the K-shaped version. The people who could work from home are most likely on the upper leg of the K. On the other hand, if you lost your job and/or had COVID related challenges, you are most likely on the lower leg of the K.
For the remainder of 2021, the big factor will be the evolution of the coronavirus. When will the vaccine and other measures get the pandemic behind us?
Of course, as we deal with the pandemic, we still have our ‘normal’ economic concerns to deal with. It appears we’re on the edge of a long-term transition regarding energy. It will also be interesting to see if this tentative move from Reaganomics, pushed by the pandemic, is a longer-term phenomenon or transitory.
I see some suggesting that we are entering a Goldilocks stage of economic growth. This seems to me to be what the market wants to expect – low interest rates, economic stimulus, etc. will lead to a very robust recovery without long term inflation.
In the end, je ne sais quoi. But, what will be will be!
The MSCI Emerging Markets Index has increased its allocation to China. Per Axios:
“MSCI said Thursday it would quadruple the percentage of access foreign investors can get to stocks from mainland China in its widely tracked emerging-markets index, which is tracked by nearly $2 trillion of funds.”
Investment in Emerging Markets maybe on the rise and the change in the MSCI Index may help start a trend.
Another group of beneficiaries from the new tax law – Accountants.
For all the headlines Alphabet has received, this is kind of interesting. Dominos stock has actually outperformed since the went public. Either one would have been a good investment 15 years ago, but 3600% does beat 2500% rather handily!
This chart was part of today’s Wall Street Journal Daily Shot.
Looks like Oxford Economics is expecting at least somewhat of a slow down this year. They also had some information on the potential impact of the government shutdown. However for now, the year over year comparisons will be harder due to the impact of the tax cut impact in 2018
If I recall, they were suggesting that the shutdown might result in around a 0.4 tenths of a percent reduction per quarter.
Lets hope that gets resolved soon.
Who knew at the start of 2018 that the stock market’s ride would be this wild? Although after a very lucrative 2017, it should have been reasonable to expect a change.
The challenge is always to try to determine which way to go – going forward. It turns out that hindsight is not very helpful looking forward. Looking backwards, I would say it was easy to see that a trade war with tariffs and the resulting business disruptions and uncertainty were going to be a problem. But, the timing, magnitude, and duration of the challenges were and actually still are hard to quantify.
If foresight was any good, we may have known when to make some changes, but I’m pretty sure art and fine wine would not have been my alternate investments.
Luxury Goods Outperform as Markets Swoon WSJ 12-31-2018
On the other hand, in spite of its lumps and bumps our democracy and capitalism based economy will almost certainly continue to work going forward. And, although Art and Fine Wine may be perfectly good asset classes, I think I’ll stick with Equity, Fixed Income, and Cash along with some real estate for my investment assets.
Have a Happy New Year!
This was the lead blurb on Seeking Alpha this morning.
Obviously good news historically, but what about looking forward?
The S&P 500 will tie the record for the longest U.S. bull market in history today at nearly 3,500 days, rising more than 320% since March 9, 2009. It’s a record few would have predicted when stocks struggled to find their footing after a 50% plunge during the financial crisis. There is still no shortage of bearish warnings out there as analysts debate the future, but many investors continue to see plenty of gas left in the tank for equities.