It has been refreshing that our recent conversations with clients have become dominated by news of rising vaccinations, increased stimulus packages, and improving economic statistics. The year ahead should continue to bring more positive headlines than we suffered with over the last 12 months. As the U.S. and global economies emerge from their COVID cocoons, we will see consumers, students, and business owners re-engage with their former lives.
Rather than listen for an ever-elusive all-clear whistle, we should do as we have always done when emerging from prior tragedies and tough times: learn from the past, incorporate those lessons into our actions, and move forward.
The road ahead for the economy, the financial markets, and COVID looks clear compared with the pea-soup fog that clouded our lives last year. Still, the road will remain bumpy as we navigate concerns over rising interest rates, increasing inflation, and global political challenges.
As we peer ahead, our focus will be on the three pillars supporting the current economic rebound: the unprecedented fiscal stimulus, the low-rate Fed policy, and the increase in the vaccinated population. These three pillars will help determine the winners and losers in the post-pandemic world. We began repositioning portfolios last year based upon our expectations for the economy, and we’ll continue to make changes carefully, with humility: As legendary investor Sir John Templeton warned, “An investor who claims to have all the answers doesn’t even understand all the questions.”
Fiscal Stimulus: More Spending than in WWII
The $1.9 trillion American Rescue Plan is expected to provide enormous support to struggling families. By one estimate, the poorest one-fifth of U.S. households will see their incomes rise by 20% this year. To put the fiscal spending over the last year in perspective, the government spent $5.5 trillion fighting the effects of the pandemic more than the $4.8 trillion in today’s dollars we used fighting World War II, according to a Manhattan Institute estimate. All this money should support consumer spending, especially as the economy reopens later this spring.
The Fed: “Refilling the Punch Bowl”
In mid-March, Fed Chairman Jerome Powell reaffirmed the Fed’s commitment to aggressively encouraging economic growth. Indeed, the Fed has embarked on a subtle but momentous shift in the way it conducts monetary policy: Overturning years of proactive policy of acting preemptively to slow the economy at the slightest hint of growing inflation, the Fed will now act reactively only when it looks as though inflation may rise to a risky level. The Fed is also continuing to buy bonds, currently at a pace of $120 billion every month. Rather than “taking away the punch bowl”, it’s refilling the bowl with a potent brew.
Vaccinations: 100 Million Doses in 58 Days
Not only is the U.S. a leader in global vaccinations, but it appears that initial apprehension about the vaccine is declining, which increases the likelihood that we’ll achieve herd immunity. President Biden set a goal of 100 million doses administered within the first 100 days of his administration. This goal was achieved in 58 days and his new goal is 200 million vaccines in 100 days. As of this writing in late March, more than 130 million people have received the vaccine. We may even return to a semblance of normal life by July 4, if we’re lucky.
These three pillars of growth, in combination, have convinced the Fed to raise its GDP forecast for 2021 to 6.5% from 4.2% in December. They also predict that the current 6.2% unemployment rate will fall to 4.5% by year end. That would be the highest rate of growth since 1983 and a notable decline in unemployment. In that environment, we expect inflation to increase from the extremely low levels of last year—to or slightly above the Fed’s 2% target into 2022: not alarming levels.
Implications for our Portfolio
In this environment of renewed economic growth, societal reopening, and rising inflation we see two broad trends emerging that affect how we’ll position our portfolios.
The first trend is one we have discussed in prior notes: a broadening of market participation beyond the largest technology stocks. As you can see in Figure 1, for the first eight months in 2020, the FANMAG (Facebook, Apple, Netflix, Microsoft, Amazon, and Google/Alphabet) stocks dramatically outperformed the equalweighted S&P 500 Index. These stocks were viewed as primary beneficiaries of the work-from-home environment. As vaccinations increased and fear of economic collapse was replaced with greater confidence in a recovery, the tech darlings stalled and the “other 494” stocks in the S&P 500 began to outperform. Many smaller companies and cyclically-oriented value stocks have been winners since last September: trends that we see continuing. We have positioned our portfolios accordingly.
Another trend we see continuing is the switch from standing “on line” in a local retail store to shopping “on-line” via the internet. This shift from an analog to a digital world was accelerated in 2020 but has been taking place over the last 25 years. In the U.S., retailers are the largest private-sector employers, providing jobs to more than 32 million—primarily women and young people.Those jobs are increasingly at risk because of the digital transition we’re living through. As an example of how retailers need to adapt, consider how U.S. stores differ from their global counterparts. In America we currently have 24 square feet of retail space for every man, woman, and child. That’s three times more space than in the U.K. and six times more than in China. As our economy increasingly moves from analog to digital, we will need to rethink what our Main Streets look like and how we invest on Wall Street.
The road ahead will present opportunities and challenges. We expect increasing clarity on the economic front but lingering uncertainties in the financial markets. However, those uncertainties are exactly what we look for because they create opportunities. As Voltaire said, “Uncertainty is an uncomfortable position. But certainty is an absurd one.” In other words, we at PUA can’t know everything. But as intrepid investors, we can exploit ambiguities for their potential to grow your wealth.