I was watching something on television the other day and I saw a match.com commercial showing Satan matching with UserName: 2020. I thought the commercial was fantastic and did a nice job summing up the year for many of us. Enjoy! (https://www.youtube.com/watch?v=pDjlrVTPPQI)
As it pertained to markets, 2020 was a rollercoaster of a ride and was one of the most challenging yet rewarding years I can remember as a financial advisor. Looking back, the story of 2020 should have been “buy the dip,” understanding that economic contraction was not the stock market, which I discussed in detail in my article “Are the markets and the economy married?”. Instead, for many, the story of 2020 was “hold on for dear life”. Those who had a competent advisor probably developed a greater trust in the process, and happened to end the year with positive results. This is one of the reasons I think it is so important to have a financial plan and to have purpose and trust in the plan that was designed for you. Even those who had a plan certainly had some heartburn in 2020 but having that plan often served as reassurance in the process.
It is hard for me to decouple COVID-19 and the vaccine rollout from the eventual jump start of the 2021 economy. I think 2021 will be centered on a return to normalcy in our daily lives and for most, normalcy provides comfort. One thing we know is that “Money Makes Markets Move”. I wrote an article in 2020 about the increased savings rates for a majority of individuals (Savings Rate Increase Article), that coupled with government stimulus payments, has not only led to an increase in savings, but also a decrease in credit card debt. Many people, yourself included, are waiting for the safe time to go out and spend some of that saved-up money. It is my hope that this spending will translate into needed profits for many of the beat down industries (restaurants, hotels, travel, etc). Other areas of cash injections that I will be monitoring are the sources of money that can make the market move: The Treasury budget deficit, the SOMA balance sheet, aggregate bank credit, and the levels of money market funds.
I would expect the majority of the market moving money to first come from the Treasury budget deficit, as the Biden administration pushes spending in green infrastructure and environmentally friendly technologies, and then an increasing proportion of funding to come from bank credit expansion and money market funds. SOMA balance sheet expansion (QE) will remain a source of liquidity as well, at least until the mid-term elections.
Investment Opportunity in the Green New Deal -(Politics Pundits and two old white guys)
Joe Biden wants to lay the groundwork to put the U.S. on track to achieve a “100% clean energy economy” by 2050 at the latest. To accomplish this, he plans to sign executive orders and push for Congress to pass legislation (which will be much easier with a democratically controlled congress) that establish milestones for meeting key clean energy goals by 2025. The benefactor of this will be the green energy companies and you can expect much of the money market cash held now to flow into green/alternative companies. I think 2021 will be the start of a gigantic bull market fueled by historic amounts of money flowing into a new technological paradigm that has not been since the 1990’s. It’s the start of the “new roaring 20’s” just like occurred after the last pandemic one-hundred years ago.
Investment opportunity in Infrastructure-
I would expect the Biden presidency to focus on an infrastructure bill. Both parties are on the record acknowledging our crumbling infrastructure system and the needs for updated/safer roads, bridges, etc. The bipartisan support is why I have a high level of confidence that something like this could pass legislation and begin as early as 2021.
There are a few economic factors working in the favor of a large “rebuild America” type bill. Perhaps the largest argument to adding additional debt to our country’s already ballooning debt issue, is that interest rates are incredibly low and aren’t seeing an increase any time in the near future. There is incentive for either party to pass an infrastructure bill while funding costs are cheap. Now is the time to borrow to spend on long neglected projects. Both candidates have highlighted the improvement of our infrastructure as a top priority. The second reason is our currently high unemployment level. Right now we have relatively high unemployment rates, and an infrastructure bill would go a long way in addressing this need in the labor force.
Investment Opportunities in Emerging Markets and Commodities – (Politics Pundits and two old white guys)
The stock market normally prices in “news” well in advance of the actual news. It tends to be very predictable in nature and can at times get the cart in front of the horse. I believe there will be some opportunity in Emerging Markets in the next few years. The underperformance of emerging markets as a group isn’t exactly a mystery. Stale commodity prices and massive corruption scandals have effectively knocked Latin America out of the game for a better part of the last decade. Slowing growth in China and war in the Middle East certainly haven’t helped either. Biden’s administration would likely preside over a less confrontational trade agenda that should generally be better for emerging markets. In addition to the more favorable global trade agenda, the lower dollar will also help emerging markets with high debt to GDP ratios that are often reliant on dollar denominated debt and dollar funding may be seeing an even bigger tailwind. Some of the countries that may be seeing an easing debt burden from the weakening dollar according to debt to GDP ratios listed in the World Population Review. (https://worldpopulationreview.com/countries/countries-by-national-debt)
South Africa (57.81%)
The combination of a dovish Fed and a weaker dollar make Emerging Markets more attractive than they have been in years.
Investment opportunities in Gold and Commodities –
Gold is an asset. As such, it has intrinsic value. As a rule, when the value of the dollar increases, relative to other currencies around the world, the price of gold tends to fall in U.S. dollar terms. It is because gold becomes more expensive in other currencies. As the price of the dollar moves lower, gold tends to appreciate as it becomes cheaper in other currencies. Gold can serve as a non-correlated asset to the stock market helping it balance the risk in some portfolios. I think gold and other commodities can serve the right portfolio as an asset placeholder as we wait for stock indexes to sell at more reasonable valuations. A wise man once said, “to everything there is a season and a time for every purpose under heaven.”
By my calculations, nearly 60% of the S&P 500 Index is compromised of disinflationary assets, including roughly 40% in the technology sector, which I am including Amazon, Alphabet and Facebook in (Amazon which has a 4.3% index weight, is classified as a “consumer discretionary” company Alphabet which is 3.5% index weight and Facebook 2.2% index weight, are classified as a “communication services”) higher long-term interest rates could hamper some of the returns of the broader stock market while amplifying returns in the sectors which have been held back by the lower longer interest rate narrative. From my vantage point, commodities, another large asset class outside of stocks and bonds, appear to be the fulcrum of the opportunity, being the most undervalued and most out-of-favor. While it is difficult to predict when interest rates will rise, I would think we will see some upward pressure in the next 12 to 24 months.
I have been spending the first 30 days of January digging for future opportunity as we turn the page to 2021. I have made some changes in many of your accounts to accommodate areas of opportunity I see in 2021. These are not wholesale portfolio changes, but adjustments to continue to try to achieve the goals we have set forth with each of your plans. I will continue to monitor the situation and make changes as we move through the year. Most importantly, I want you to make 2021 a fantastic year for you. Take care of yourself, do something you have always wanted to do and spend each day making the lives of others better for having met you. I feel this will be the key to putting a rough 2020 behind us and setting our sail for a successful 2021.
Philip Lockwood | Founder + Managing Partner
Address: 3100 Ingersoll Ave Des Moines, IA 50312
Phone: (515) 274-8006
Website: Lockwood Financial Strategies
Securities offered through Parkland Securities, LLC, member FINRA (FINRA.org) and SIPC (SIPC.org). Investment Advisory services offered through SPC, a Registered Investment Advisor. Lockwood Financial Strategies, LLC is independent of Parkland Securities, LLC and SPC
Securities offered through Parkland Securities, LLC, member FINRA/SIPC