February 2021, Portfolio Meeting Recap: Positive Indicators vs. an Expensive Market
The first Tuesday of every month marks the Denver Wealth Management, Inc. (DWM) Portfolio Review Meeting (PRM).
Every DWM advisor (virtually) assembles in the war room to discuss all things about our investment portfolios and the respective holdings:
- What are the 1-, 3-, and 10-year outlooks?
- Where do we see the market going as a whole?
- How can we best address our clients' objectives (i.e., generate income, hedge against risk, and/or grow assets)?
Our February PRM mainly debated the current uncertain market environment. While many indicators point to a promising 2021 for equity investors, the possibility of impending doom lingers. (Not quite impending doom, but many investors are wary of the over-valued companies that significantly outperformed the benchmark in 2020.)
In other words, how can we position our clients to potentially thrive in a growing market while mitigating for a potential downturn in the event of a circa-2000 bubble-burst?
The purpose of this podcast episode is to breakdown seven optimistic market indicators, including government aid, vaccine development, corporate earnings, household savings, inflation, and interest rates. However, as noted above, we highly recommend that investors voyage through 2021 with a diversified portfolio.
After all, while this article mainly explores the equity market, our Investment Committee (DWM advisors) covered many other investment vehicles in our February PRM, including commodities, cryptocurrency, floating-rate securities, micro-cap funds, and real estate.
An appropriately diversified portfolio is designed to address your investment objectives while hedging against risk—don't put all of your eggs in one basket. Schedule a free consultation to address your long-term financial plan.
Alright, bring on the optimism!
1. HISTORICAL FISCAL STIMULUS
In late March-early April of 2020, Congress pumped trillions of dollars into the economy—done mainly through direct payments to Americans, increased unemployment benefits, and PPP loans and other low-interest business aid.
Flooding the economy with new currency essentially creates a floor designed to prop up assets, which has, historically, boded well for equity investors. Here's a different look at it: more money lining Americans' pockets leads to more spending, which can stabilize prices. If corporations benefit from relatively steady prices and increased cash flow, investors will often reap the rewards.
Now 50 days into 2021, the government's loosened fiscal policy may continue. When writing this, lawmakers are negotiating the prospective next round of federal aid, intended to inject the economy with more money.
2. FED SUPPORT
As the saying goes, don't fight the fed. Similarly to Congress, the central bank (or "the Fed," as the cool kids call it) wasted no time loosening monetary policy. In March 2020, at the onset of the Covid-19 pandemic, the Fed slashed interest rates to near-zero and increased open market purchases.
By cutting interest rates, the Fed made money "cheap." Banks had more leeway to provide loans at floor-scraping levels, incentivizing business owners and individuals to borrow. Business owners received an attractive opportunity to take a risk on themselves, as were individuals who benefitted significantly from cheap mortgage and refinance options.
Open market operations refer to the Fed buying and selling bonds to either pump money into or take money out of the economy. Generally, the transaction involves government Treasury securities; however, with a sense of urgency, the Fed initiated the purchase of publicly traded bonds as well.
Moving forward, the Fed has committed to keeping interest rates low—at least for the near future—to continue boosting economic activity.
3. VACCINE PRODUCTION & DISTRIBUTION
At the time of writing this, three Covid-19 vaccines have been FDA-approved and begun injecting the arms of Americans. I say "at the time of writing this" because vaccination research and development is surging—perhaps another trend that will continue throughout 2021.
As new information continues to arise surrounding the Novel Coronavirus, we are confident for a healthy 2021 economy.
4. LOW INFLATION
One of the uncertainties facing investors is regarding potentially high inflation. Theoretically, it makes sense: government spending often puts upward pressure on prices of goods and services, especially when that spending is in the trillions.
Of course, high inflation is a possibility. Pent-up demand coupled with the reopening of retail stores and restaurants may contribute to a rise in inflation and, consequently, a less-than-great return on equity investments. However, the substantial federal aid is temporary. Thus, although probable, a period of high inflation is likely a mere short-term obstacle for equity investors.
5. INCREASED EARNINGS
It's the middle of February, and most S&P companies have reported 2020 fourth-quarter earnings, which eclipsed analysts' January 31st predictions. Year-over-year, S&P corporate earnings increased by 3%.1
That's 2020 earnings. Well, 2020 sucked for many companies (there's no better way to say it than it just sucked). Fast-forward to 2021, many economists and investors are confident that companies are in a position to exceed last year's financial performance, which would directly impact investors.
Of course, nothing is certain—we can't promise that 2021 will be any better—but 2020 set the bar pretty low.
6. HISTORICAL CASH ON THE SIDELINES
As spending declined in late March 2020, household savings rose. It makes sense in a way: When retail shops close, consumers can't spend their money there. Sure, online shopping increased dramatically, but the fear-driven uncertainty that plagued 2020 increased the personal savings rate to 33% in April—compare that to the previous record high of 17.3% in 1975.2
More cash on the sidelines is excellent, temporarily; however, if left out of circulation for an extended period, high savings may hinder economic growth and recovery. (No spending or investing = bad for businesses.)
The good news is that economists doubt that will be the case. As restaurants and shops reopen, consumers' pent-up demand will likely take the reigns and aid in boosting the economy.
7. NEGATIVE INTEREST RATES
This is a less-talked-about point, but an exciting idea nonetheless. Negative interest rates are exactly as they sound: Banks charge interest to clients in return for storing money. Let's look at Germany, for instance, where the long-term savings rate was -0.58% as of January 31st (YCharts):
Hypothetically, you would like to invest $100,000 in a German government-issued bond. Rather than receiving semi-annual interest payments, you are, essentially, charged 0.58% for storing your money.
Compare that to the United States, where the long-term interest rate was 1.08% as of January 31st (YCharts). Using the same hypothetical scenario, you would receive semi-annual interest payments for investing your money in a U.S. government-issued Treasury security.
Of course, that's a relatively surface-level scenario. As an investor, however—German or American—would you rather invest in an American government-issued Treasury security that pays interest or a German government-issued bond that charges interest?
Positive interest rates are not a luxury that all countries have. As reported by the European Central Bank (ECB), Germany is one of the many European countries that currently posts negative long-term interest rates (YCharts).
Other factors aside, intelligent investors are more likely to invest in countries with positive interest rates that provide a better return on investment—another positive indicator in our 2021 outlook.
On one side, investors argue that the U.S. stock market is expensive—an argument that certainly has merit. There is the possibility that individual companies or sectors may experience a pull-back, if not a bubble burst.
On the other hand, we believe in several significant positive indicators that promote a prosperous 2021 for investors.
What can you do? I will reiterate the importance of diversification: Don't put all of your eggs in one basket. Diversification is an excellent investment-strategy that may help you capture much of the upside potential in the market while hedging against potential losses.
If you have any questions regarding your long-term financial plan, please do not hesitate to call our office at (303) 261-8015. We are always happy to discuss. You may also request a free consultation with one of our Denver-based advisors here.
1"The Search for Income | Daily Market Update." LPL Research, February 16, 2021.
2Fitzgerald, Maggie. "U.S. Savings Rate Hits Record 33% as Coronavirus Causes Americans to Stockpile Cash, Curb Spending." CNBC, 9 May 2020. https://www.cnbc.com/2020/05/29/us-savings-rate-hits-record-33percent-as-coronavirus-causes-americans-to-stockpile-cash-curb-spending.html (Accessed 19 Feb 2021)
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