Monthly Market Update- January 2021
Happy New Year! What’s in store for January’s market?
Well, last night’s apparent Democratic sweep in GA has potentially major market-moving impact, not just for the next 6-9 months but perhaps setting the stage for an entire decade. Read below.
December’s Market Success - This never gets old to say – this past December was another terrific month for stocks. A fully diversified equity portfolio jumped another 4.2% in value, putting a cap on a 14.2% full year of 2020 and up nearly 70% (yes, that’s seventy, 70) since the March 23, 2020 bottom. After a massive expansion in November, the breadth and depth of the markets only further accelerated in December with trading volume and new high data showing no misgivings whatsoever. As our research partner Strategas Research noted, at year-end 90% of all stocks were in a decided uptrend, the best reading since the monster up-year of 2013. Not that there isn’t some chance for a mini-consolidation or two along the way – more below on this – but past instances when the markets have been this significantly ‘in gear’ have virtually all led to further strong returns over the next 12-18 months.
2020- one of four “outside” years
Worthy of note is, also according to Strategas, that 2020 was one of only four ‘outside’ years in the last hundred, when the year’s low (on March 23) was below that of the year before and the year’s high (on December 31) exceeded that of the year before. The other years were 1935, 1982 and 2016. The return on the S&P 500 in the years that followed were 28%, 17% and 16% respectively, and all have a common theme, a policy-driven adjustment (New Deal, Federal Reserve lowering rates and pending tax cuts, respectively) to a very strong economic transition, from recession/slow growth to strong re-acceleration, which then actually occurred over the next two years. I think that 2021 has that very same kind of potential.
So, let’s set the current economic stage. Long time readers of my monthly Updates will recall that I had not been the biggest fan of where the economy had found itself post-tax-cuts in 2019 and into early 2020. In my opinion, it had become very transactional and indulgence-based and therefore susceptible to being knocked for a huge loop. My on-going metaphors were that we were creating too many jobs ‘folding towels and dealing blackjack’, i.e. building too many hotels and casinos, but very few actual making anything substantial. At the time not knowing anything about Covid-19, I worried that the economy would have to undergo a ‘re-boot’ of some kind in the form of at least a mini-recession, taking stocks down accordingly in at least a mini-bear market.and then of course we got a whole lot more than that.
Now with vaccinations underway as well as an economy that has begun to move forward, the seeds for that strong re-acceleration are more than beginning to germinate. In fact, I think we can use the term ‘sweet spot’ for future economic potential.
Here is where I believe we are economically right now:
- An economy producing well below its potential – many sidelined resources.
By far the biggest sidelined resource is our workforce, at a rate still worse that prevailed at the darkest hours of the Great Financial Crisis in 2008-2009. That’s absolutely bad news…but the good news is that we have a vast number of people who will come back to work. Secondly, by almost every measure, our Inventory/Sales ratio is near its lowest level ever, meaning that we need a vast increase in goods production just to modestly restock the shelves for future demand.
- Tremendous excess liquidity
Just in 2020, the M2 Money Supply, essentially the amount of ‘working capital’ made available to the economy, expanded 51%*, versus a long-term average of 3.1%. Our national savings rate has exploded, well into double-digits from a prior 4-5%. So, both the banking system and the aggregate household balance sheet have plenty of capital ready to be used.
- A COVID-19-necessitated higher degree of productivity for the resources we are consuming.
Via any productivity measure, the economy is using less resources to provide – on a per unit basis – goods and services. As an example, much work is now being done just as, if not more, effectively ‘working from home’ than having to traipse into an hour-plus-away office building. I’m a fan!
- A changing and expanding demographic profile.
19th Century French sociologist Auguste Comte was famously quoted as saying ‘Demography is Destiny’. As we sit here in the early 2020s, just as we did with 80 million Baby Boomers in the early ‘1980s, our 84 million Millennials are now totally coming of age as economic accelerants in their own right…and Gen Z will start entering the work force in the next couple years.
- Greater fiscal stimulus ahead, perhaps a lot greater.
The Democratic sweep has now put all of D.C. under one-party control. Yes, there is certain truth to the supposition that divided government is actually ‘more-better’ for the economy and the markets because no party has the majority and therefore the ability to enact something economically stupid. That said, the ability to fully control the legislative process is very, very powerful. One lesson Wall Street has learned is to embrace the potential for meaningful (i.e. non-stupid) economic policy. The GOP used its full control of D.C. in 2017 to enact massive tax cuts, and stocks melted up accordingly.
We already have the Consolidated Appropriations Act ("CARES Act #2"), the $900+ billion stimulus package finally enacted and signed into law on December 27th. It is entirely reasonable to believe there will be a "CARES Act #3", sometime in the first month or two of the Biden Administration, and with all due given to their importance, from an economic standpoint, these may well prove to be only a warm-up act to the potential “real magilla”, a wide-ranging infrastructure stimulus package. I would assume at least a $1 trillion price tag. However, unlike the CARES Act iterations, all vitally important in keeping the economic lights burning but nothing further, this final stimulus will almost certainly have a ‘multiplier effect’, generating far stronger-for-longer economic growth than just the immediate effect of the funds provided and expended.
Never mind the high-impact jobs in rebuilding highways, ports, bridges, airports and mass transit that will be created – they will be great of course, but more than that, entire industries in climate mitigation and renewable energy and who-knows-what-else can be spawned and magnified. Could this be the earliest and first catalyst for a potential 21st Century version of the ‘Roaring ‘20s’, harking back to the full decade of growth coming out of WW1 when stocks provided a decade of annualized average 9.5% returns? I wouldn’t want to bet against it. Yes, it ended badly, but not until 1929. Where do we sign up?!
Even with full Democratic control, something like this won’t be easy and I most certainly concede it can’t be done without some degree of GOP buy-in, in both chambers, but I’m very optimistic. It was only 20 years ago when the newly out-of-power Democrats** played the ‘Party of No’ for the first two years of the Bush 43 Administration. The Republicans successfully portrayed them as obstructionists, especially in the wake of 9/11, and blew them out in the ’02 midterms and set the stage for 43’s re-election in 2004. The analogy between 9/11 and COVID-19 couldn’t be more apt. That lesson will not be lost on today’s GOP leadership.
Back to today. Even as I express economic optimism, I will also concede the possibility that the stock market’s near 20% returns since Election Day may well have eaten into those for early 2021. The conventional wisdom on Wall Street has been that a Democratic sweep would be a distinct negative since many of those tax cuts will be subject to reversal, and that impact would more likely be felt in mega-cap tech stocks, which have a disproportionate impact upon the major stock indexes. Large cap health care, another big market weight, might also face headwinds...but I believe the markets will very quickly price-adjust for this and, accordingly, I will almost certainly be inclined to use any substantive correction in stock prices as an entry point for new and further stock investments, particularly for non-U.S. (particularly Emerging Markets) and more cyclically oriented (like U.S. Small Caps) equity sub-classes. It is equally possible that we’ll get nothing more than an occasional negative blip, not even worthy of worrying about or planning for.
Hope on the horizon?
Yes, the economy is still bad. But every, every, every, every time it’s gotten this bad, it’s then gotten better...and better and better and better still. If past is truly any prologue, the magnitude and duration of the opportunity is massive. As noted in two recent Updates (December and November Mid-Month), we have already moved to an overweight in stocks for client portfolios. We have already benefitted from those steps and we look to do more if/when the opportunity presents.
Final thought, watching what I hope will be our national catharsis this afternoon with the Trump-encouraged violence within our nation’s capitol. It’s not affecting Wall Street and it shouldn’t, because the Street knows, in its own pragmatic (which some might even call callous) way, that it’s a one-time-only, albeit horrific beyond horrific, demonstration of the worst of our country, which be behind us in short order with zero economic effect. And hopefully those responsible, at every level, will appropriately be called to account. But like our darkest of darkest days now with COVID-19, what lies ahead is so much, much better. And that’s what matters to Wall Street and that’s what will matter far more to us for our future than the horror of the moment.
Our best wishes from KLR Wealth for a very happy 2021! Your comments and questions are welcome any time.
*51% is not a mis-print. It’s a full fifty-one percent. This is truly monetary ‘shock-and-awe’.
**The GOP began the Bush 43 Administration with a 50-50 split and a small House majority, therefore starting with full functional control. However, VT Senator Jeffords converted from Republican-to-Democrat in May 2001, putting the Democrats in charge of the Senate. As noted above, that did not end well for the Democrats in 2002 and 2004.
Published on: 01.06.21