Sell the Gloom Buy the Boom! – January 2021 Commentary
“It can be easy to get swept up into catastrophizing the situation once your thoughts become negative…remind yourself that there are many other potential outcomes.” – Amy Morin
There have been six economic recessions in the United States in the past quarter century. Our most recent experience of economic tempest and tumult however, has been unique. Economic downturns result in the loss of jobs and thus a lowering of incomes. Not this time though. As of September 30, 2020 the income available to be spent by the American people INCREASED 7% year over year. Earnings through employment declined but not by as much the $2.2 trillion provided under the CARES Act signed into law on March 27, 2020.
Responding to the economic uncertainty created by the pandemic we dramatically increased our annual savings from $1.2 trillion as of September 30, 2019 to $2.5 trillion. We are currently saving 14.3% of our incomes, twice their pre-pandemic level. When we resume our normal lives, and the likely drawing down both the amount and the level of our savings to their pre-pandemic levels, more than $2.5 trillion or 12% of the current size of US GDP will be available as fuel to feed the fires of the US economy.
The financial markets seem to be anticipating this likelihood. US small company stocks, whose earnings are almost solely dependent upon the domestic economy, rose 31.3% in the 4th quarter of last year and 4.85% in January versus the S&P 500’s 13.82% and -1.02% respectively. CNBC on January 24th carried the following news item about global transportation. “Shipping costs have skyrocketed as desperate companies wait weeks for containers and pay premium rates to get them.” Following the stock markets meteoric rise in November, commodity prices have experienced dramatic increases. Since December 8th oil prices are up 15%, wheat prices 13%, corn prices 29% and pork prices (for those producers able to afford the cost of feeding them!) 16 ½%.
For investors, 2021 may well be a year that, while close in proximity to its predecessor, harbors within itself more differences than similarities. A booming economy creates competition for the financial markets in the deployment of capital because of increased opportunities for that capital to seek profits in the real economy. It may also be a year that represents a transition from the decades since the 1980’s to a rather different looking future where perhaps interest rates begin to exhibit a tendency to rise rather than fall and where inflation becomes something more than just a historical construct.
With all the talk of bubbles in recent days I thought it might be opportune to invest in Wrigley’s stock but unfortunately Warren Buffett bought the company in 2008. In thirty-eight years of employment in the financial services industry (I began my career at a VERY early age!) I’ve seen a great many things but one I’ve never seen is an event that many investors are anticipating. No, the stock market is NOT in bubble territory.
No, the stock market is not about to crater and no, GameStop stock doesn't mean much of anything at all beyond its serving as a very interesting human interest story.
Investors portfolios hit the pause button In January. The last several days of the month separated investors from a point or two of profits and the typical 60/40 stock/bond portfolio was up some fraction of a percent. Small Company stocks were up almost 5% as mentioned above with Energy stocks +5% and Foreign Emerging Markets +3% but Large Company stocks and Foreign Developed Market stocks were exercises in break even. Meanwhile, in the real world, prepare for the good time’s ahead!
Mark H. Tekamp; February 1, 2021