“People always sound smarter when they are bearish. It’s always the skeptic who points out how the world is going to ruin that is considered a sage, but when you really look at the data…the world continues to get better.” – Chris Davis (President, Davis Advisors).
How fitting this quote is as we reflect on the year we have just experienced. Negative news sells and with us bombarded 24/7 through all of the various medias, it can get downright depressing. As we put this year behind us, we will attempt to paint a picture of optimism and the brightening that has always followed hardships.
On the health front, the Coronavirus has wreaked havoc on the world like nothing we have witnessed in our lifetimes. The loss of life and the destruction of many businesses is unparalleled. Medical professionals have again proved their unwavering commitment to serve those in need no matter the risk. The coming together of the world’s drug companies and their research teams resulted in the discovery and production of a vaccine in record time. As the vaccine is distributed worldwide, we should begin to witness the end of this virus and normalcy again return to our daily lives.
Economic decline caused by lockdowns due to the Covid-19 virus is being confronted on a number of fronts. Congress has recently agreed on another stimulus bill that will help individuals and businesses to the tune of $900 billion.
The Federal Reserve is also optimistic and in a recent meeting said that the economy has potential for strong growth in the latter part of 2021. The Fed left interest rates unchanged at their current low rates and stated it remains committed to doing whatever it can to ensure a strong recovery.
The economy is rebounding. Data from the housing sector alone shows solid growth. Numbers for new home sales are at levels we haven’t seen since 2006. The same story for existing home sales. Inventory of homes for sale is very low. Considering that the housing sector accounts for roughly 18% of economic output, it should support continuing expansion.
Further evidence of consumer and investor optimism is the domestic money supply know as M1. This includes a household’s most liquid assets such as bank savings, CD’s, checking accounts and money market funds. Due to the pandemic panic back in February, roughly $1 trillion moved into these safety assets. This money will eventually come back out of these cash-type vehicles in search of returns higher than the near zero return they currently provide. To date, only about $500 billion has come back out. This leaves quite a bit of idle cash that still needs to come out in search of higher returns.
We have spoken at great lengths in the past about how the markets look out to the future 6 – 10 months and not the present economic climate. It is a mistake to get caught up in the noise generated by some of the media causing wild swings in volatility based on what could happen. Daily swings have occurred based on speculation regarding the new administration. Will taxes increase? Will we see new regulation of industry? Will an aggressive new green energy be on the agenda? No one knows for sure. Especially with the Georgia Senate runoff occurring this month – it’s just a guessing game.
The markets for the year to date have rebounded considerably from the lows in March. Most recently, the stock market enjoyed one of its best months in history in November. The small cap Russell 2000 Index was up 18% for its best month ever. The Dow Industrials had its best month since 1987. It wasn’t just U.S. stocks either. The Ishares All Country World Index ETF had it’s second best month ever. Japan’s Nikkei hit its highest level since 1991 and Germany’s Dax Composite was up 15%.
Today, there are definitely more traders in the market than almost ever before, and stocks have just recently returned to hitting all time highs. But this is a bit different from the action in past market peaks. The traders that are getting the most bullish now are not the rookies or mom and pop investors. These investors are the big dogs on Wall Street. And they tend to see the bigger picture better than most.
We have referred to the monthly Global Fund Manager Survey from Bank of America in the past. With over $600 billion in assets under management, the way they are investing that money has been a useful barometer over time. In the most recent survey, a whopping 84% of those surveyed said they expect company profits to rise over the next year. That is the highest rating in 18 years. Prior highs were in 2002 and 2009 which each mark the beginning of a multi-year bull run.
If markets continue their rise and the vaccines take hold, there should be an increase of pent up demand for travel and entertainment. This will further help the economy and we should see those cash dollars begin to be recommitted to stocks.
There will always be something that could go wrong or act as an impediment to the stock market. The sooner one stops making decisions based on “what could happen” and instead makes decisions on “what is happening” the more likely they are to succeed.
May you and your family stay safe, happy, and successful in the New Year! We thank you for your trust.
The Lesjak Planning Team
Dave, Mike, Marc, Nathan, Kevin, Kathy, Ryan