I’m writing this on the early afternoon of January 6, 2021, as the “alternate reality” of U.S. politics and the rise in markets continues. Right now, our Congress is debating whether to accept the votes of the Electors in Arizona. Thousands of pro-Trump protestors have descended on DC and are standing on the steps of the Capitol. The GOP has mostly lost control of the government, Covid 19 is still ramping up and the vaccine rollout has been slow so far. Yet the S&P 500 is up 1.2% and the Dow is up nearly 2% just TODAY! For 2020, the S&P 500 was up 16.11% and the Dow 30 Industrials Average was up 7.69% (not including dividends for either). This after a 35% plunge in February and March of 2020 which was the fastest 35% drop in history - and was followed by the fastest recovery in history!
2020 saw violent protests and anarchy in parts of the U.S., lockdowns, and a reduction in the size of our economy by over 30% in the 2nd quarter (on an annual basis). Record high employment followed by massive layoffs and unemployment. Huge numbers of people moving from California and the Northeast to Texas and Florida, along with corporations like Schwab, Tesla, Oracle. The most divided government since perhaps the Civil War, and many of our friends and loved ones stricken by a virus that didn’t exist 2 years ago.
As I’ve said, if you had told me in February we would be here, I would have never believed you.
In this incredibly strange time, what is going on? The short answer is the Federal Reserve stimulus. If you recall in 2008, our government nearly choked to death over providing $780 billion in stimulus to re-capitalize the banks. According to Forbes, as of October 18th, the government has provided close to $4 trillion in stimulus and spent a total of $6.5 trillion in 2020* (this doesn’t include the most recent spending that occurred over the holidays). When the Central Bank of the U.S. pumps this kind of liquidity into the economy, it’s going to have an effect and we’ve seen it as asset prices rose in 2020 and so far, have continued into 2021.
At the same time, we’ve seen interest rates at never-before-seen lows, which has also acted as stimulus. Home sales and housing starts have exploded as more people are able afford a home (if they’re working) and because millions are working from home - along with taxes, quarantines, and civil unrest - a migration out of American cities to the suburbs is occurring too. The “millennials” many never thought would leave home, have decided to start families, and move to the burbs.
So, what about moving forward? First, it appears the Dems are going to be in complete control of the Executive and Legislative branches of government and the markets are betting on big spending bills including infrastructure and more stimulus. This is why we’re seeing this unrelenting move up right now. Also, the adoption of technology has been accelerated by at least 5 years during this pandemic and tech stocks have benefited. However, most of this has been the growth of the FAANG stocks, Facebook, Apple, Amazon, Netflix, Google plus Alphabet, Tesla and Microsoft. While the bull market was somewhat broad, 200+ of the 500 stocks in the S&P 500 finished negative for the year. Market participants are simply betting on more stimulus, the vaccine and full employment. I think it’s likely we see much of that. But the dollar is losing value, Bitcoin is on a tear and it’s possible we see structural changes in the currency markets where other types of money may challenge the U.S. as the dominant reserve currency in the world. And, with all the printing of money our Fed is doing, it’s probable we’ll see inflation return in a bigger way in 2021.
How do we proceed? With caution, but fully invested. Profits will need to catch up for stock prices to remain at these levels, otherwise they will reset lower at a more appropriate price to reflect those lower profits. This time last year, the stock market was lower, corporate profits were higher, and many experts thought the market was overpriced. If it was then, it certainly is now.
Michael P Henderson, CFP® CKA®
CERTIFIED FINANCIAL PLANNER™ practitioner
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. Economic forecasts set forth may not develop as predicted.
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