2020 Quick Timeline (Excluding the deaths of Kobe & 007, plagues, murder hornets, politics, locusts, and wildfires)
- S&P continues upward pace in Jan and Feb
- Covid becomes a global pandemic
- Economy Shuts Down
- Markets plummet
- The race to a vaccine is in Operation Warp Speed
- Fed reacts quickly to give stimulus packages
- Stay at home trade rebounds, while most of the rest of the market does not
- More stimulus held up in Congress
- Election and the contentious division of America
- The return to work stocks start a rally, mostly companies that have been left behind since March
- Pfizer Vaccine approved by FDA
- Moderna’s Vaccine is proven to be highly effective and is recommended to the FDA for approval
2020 will forever be an unforgettable year.
As we approach the end of this twilight zone period, we try and focus on the positive. Clearly, financial markets are looking to the light at the end of the tunnel, and economic forecasts for 2021 are supportive. But as we look forward to brighter days, let us not forget all the incredible sacrifices and incredible acts of volunteering, adjusting, and community support we experienced in the last 10 months. While there is no shortage of negative news out there, and our hearts go out to those who had unfortunate loses during this difficult time, we also urge people to look at all the great things that happened and we experienced this year. “A pessimist sees the difficulty in every opportunity; an optimist sees the opportunity in every difficulty.” – Winston Churchill
We are not out of the woods yet…..
While equity markets are clearly getting ready for a return to normalcy, we still have a tough number of months ahead. Fitch Ratings, well known for rating bonds, recently revised up its global growth forecast to 5.3% for 2021, with the U.S. being a strong contributor to that upward revision (to 4.5% annual GDP from 4.0% in September). These forecasts take into account continued weakness in the immediate months ahead, but stronger growth in the second half of 2021.
Fitch also revised up its 2022 global growth forecast to 4.0% from 3.6%. This is really a great story for the future, and we think sets the foundation for continued strength in markets. Even though we know case rates will continue to climb, economic estimates for the future continue to move higher and extend for longer. If we do see a sell off over the next few months, don’t be surprised if “buy the dip” is the mantra you hear and the action you see in the markets.
To say it simply, markets are on a tear and seem to already have developed COVID immunity. Since the end of the election and positive news toward the vaccine, we have seen higher prices in equities across the board, and also in some other risk assets like cryptocurrencies (shameless plug digression; don’t forget to check out our post on cryptocurrencies).
Further confirming the strength and likely follow through of this rally is poor performance in safety assets. We have watched bond yields rise over the past few months and gold waffle. This is not entirely intuitive since monetary and fiscal policy is still expected and required to support the economy in its current fragile state.
Common Questions We Have Been Hearing
- Countries are still not 100% open and the economic impact has been hard. How can the market keep going up? For the most part, the companies that are outperforming on ones that have solid business models in a pandemic world, have adapted to succeed in the pandemic, have had a lot of cash in their reserves, and were not as impacted by de-globalization that has transpired over the past 9 months. These companies are valued on forward earnings, meaning what they are anticipated to earn in the future. With interest rates near zero and low risk assets giving no real ability to outpace inflation, risk on assets like stocks have adjusted as well. The earnings are now based on a post Covid world, a timetable that keeps shifting out to justify the prices being paid. Some of these valuations have rightfully gotten out of line, which we are aware of. However, some of these companies/industries that are trading on new multiples deserve it, each for their own reasons.
- Stocks seem pricey and there has to be a correction. What would you invest in? Similar to the response in the above question, some stocks have gotten a bit rich in their valuation. There are also some stocks that have and continue to be undervalued. However, just because they are undervalued does not mean that they are a good buying opportunity. Most of why they are undervalued is because of their ability to adapt, they are in a dying market and they simply don’t have the growth opportunities they may have once had. Look for a lot of M&A activity, which is another market segment our tactical clients have exposure in.
- Taxes are going to go up in the new administration, how can company valuations and Wall Street sentiment remain high? Most companies are not as impacted by the rise in the corporate rate, and the rate anticipated is still a very low rate. A tax overhaul has a lower likelihood in the next 2 years if the republicans retain control of the Senate. Companies will find ways of utilizing profit in a tax favorable way for shareholders. This isn’t a large concern of ours.
- There has been no additional COVID-19 Relief. What about all the bankruptcies that have yet to happen? As long as the Federal Reserve supports the economy, which it has done a great job of doing since the pandemic, we believe the companies that trade in the stock market will continue to fare well. We have an incoming Treasury Secretary, Janet Yellen, who in her time as Fed Chair was known as being very dovish. This means the likelihood of lower rates and focus on propping up the economy is high. Whether or not this will become a burden for later generations to bear will be a future tale, but if Modern Monetary Theory wins the day, the impact the Fed is having on todays economy will be a win for Americans.