Happy New Year to our clients and readers. It took a few weeks before gaining enough inspiration to write our first Market Perspectives of 2021. The noise of politics, social unrest, pandemics, and the threat of losing free speech can leave you at a loss for words. Frankly, America has become entrenched based on agendas, ideology, and rancor being spewed from the highest offices. The very morals and ethics on which our democratic republic was created have been defenestrated in recent months, maybe years. Amid this landscape, finding something to talk about is not difficult, writing it in such a way that provides hope of solidarity, however, is nearly impossible. With that in mind, I will simply deliver the facts in a context that illuminates and educates.
2020 was filled with more twists and turns than anyone imagined. The year began with a presidential impeachment, one that seemed unusually protracted and based on equivocal evidence. COVID-19 quickly morphed into a destructive pandemic. Social unrest ignited; protests in nearly every major city turned to violence, riots, looting, and vandalism. Since the presidential election, extraordinary events have persisted, including an ominous turn on January 6, 2021, as rioters stormed and occupied the Capitol building in Washington, DC. Immediately, the narrative continued and the current president was blamed for the reprehensible conduct of hundreds. Immediately following this event, another impeachment was impetuously delivered, long before anyone considered the facts. The very assault on a sitting president calls into question our own system of justice; innocent until proven guilty. Political factions tossed out words like insurrection and fascism. If nothing else, this is a good time to brush-up on history. Fascism is something that no living American has experienced. On the contrary, we have no idea!
A few weeks later, optimism about new stimulus measures from the Biden administration outweighed weaker-than-expected employment data. It is here we begin to isolate how the market is reacting and illuminate why it continues moving higher. Jobless claims last week were reported as 965,000, up from 784,000 a week earlier and well above the Bloomberg consensus forecast of 789,000. The reading was the highest since August and may have been driven in part by the government’s recent renewal of supplemental employment benefits. But stocks were insouciant as president-elect Biden announced his proposed $1.9 trillion of stimulus. The trend of borrowing money to temporarily assuage fear will become more and more difficult to manage. Perhaps a little perspective here is necessary. US Debt is nearly $28 trillion dollars (not including Biden’s proposed spending) or approximately $222,000 per taxpayer. Think taxes aren’t going up? At some point, the right balance of taxes, interest rates, and government spending will be necessary to avert running off the cliff.
None of this sounds like a time to celebrate. Just days away from the inauguration of the 46th president of the United States, Democrats will do well to immediately move towards a continuation of trying to rebuild the COVID-battered economy. Lest we forget, much of the economy was closed last year and state governors delivered ambiguous language that left many businesses in dire straits. Emerging as a strong and sustainable economy will take time and a deft touch from political leadership. Now, add to that a divided nation where many believe the election was rigged, unifying seems more of an ingratiating tactic versus reality. In fact, many believe President Trump is far from moving out of the picture. From an investor’s point of view, gridlock in Washington, where a single party doesn’t control the presidency and both houses of Congress, becomes a more attractive scenario.
The Democrats currently have hegemony, but only by the slimmest majority in the Senate and with a smaller majority in the House compared to pre-election. So, what now?
In my opinion, cooler heads on both sides will recognize the need for new bi-partisanship. Filibuster is not to be avoided at all costs, but it should not be a means by which good government is thwarted. The alternative to bi-partisan leadership is continued acrimony and the eventual deepening of cracks in an already fragile economy. Suffice it to say, this kind of governing will require both sides of the aisle to become more concerned with facts and trust versus “being right”.
Despite the ominous clouds over our country, and more recently, Washington D.C., the (non-political) outlook for 2021 offers some well-defined positives. Keep in mind, this requires putting political noise in one silo and considering the metrics that best illustrate performance of the economic engine.
The economy, believe it or not, is growing and should follow solid GDP growth recorded in third quarter 2020 with an equally strong fourth quarter report. Yes, I mentioned the unexpected rise in unemployment as reported last week, but much of the country is gainfully employed and working. The recent reversal in unemployment claims was mostly imputed to the leisure and hospitality industries. In other words, this interval is transitory. The wide dissemination of vaccines is expected to finally halt the COVID pandemic and get more people back to work. Fortunately, living in a world of digitization, our economy has been resilient in ways that are sometimes hard to comprehend.
Another useful metric is the housing market — a major pillar of U.S. economic growth pre-pandemic has been rebounding for months. Existing home sales, which were down 32% in May from January 2020, have been rising consistently since late spring and are closing in on a 100% increase from May lows. Building permits, which are a leading indicator for the industry, have lifted more than 50% from April’s lows. Prices have held up as well. The S&P/Case-Shiller National Home Price Index is one of the most closely watched barometers of the housing market and the data for October 2020 showed prices gained 7.9% year-over-year — that is the highest rate in six years. Part of this is prodigious growth is due to tight levels of inventory: currently the national average is at a low 4.1-month supply of existing homes for sale according to the U.S. Census Bureau. On the other side of the pandemic, we expect demand for homes — with yards between neighbors and no elevator buttons to press — will remain strong.
Our Perspective: Avoiding the facts is simply not possible given our state of affairs. My outlook is not without risks and I realize the political rancor and division among Americans adds additional complexity to an already extraordinary set of circumstances. The damage done to small businesses will take years to repair, and more stimulus (third round is beginning) from the new administration may speed the process, but at what cost. America is strong, resilient, and overflowing with intellect and talent. Yet, none of us benefit if we fail to recognize freedom of speech as a platform to inform those who make the rules. After all, elected officials don’t work for their constituents alone, they work for every tax-paying American. Finally, remarkable volatility in stocks like bitcoin and Tesla could be foretelling of a frothy market. However, such bubbles appear to be limited to select risky assets. For 2021, I expect stocks to perform reasonably well but not necessarily from the same market leaders like technology and other growth sectors. Rather, it is more plausible to see new leadership in cyclical, defensive, and income sectors. 2020 presented us with many dark days and the new year wasted no time in providing a continuation of sinister deeds. Nevertheless, we see investing opportunities and posit that timing the market, just as many tried to do in 2020, is rarely a good strategy.