Each month we ask clients to spend a few minutes to read through our newsletter with the goal of raising their investor IQ. To properly address client questions on bubbles and their potential impact on the markets, this month’s Timely Topics is a long one. Enjoy!
- The Roaring 2020s
- A 12-month shipping frenzy has started
- Washington to the rescue
- 2020/2021 NSAG scholarship winner!
- Stock market crash nearby?
- NSAG is getting a new website
- Where will the equity markets go next?
The Roaring 2020s
For the US and Europe, the decade of the 1920s was known as the Roaring 20s. A period of economic prosperity with distinctive cultural edge and changes. The overall tone was to bring back normalcy while rapidly enhancing society with new fashions, media distribution, transportation and technologies.
A century later, our world is likely headed into a new era of The Roaring 2020s. After a year of lock downs and isolation, people from across the globe are going to slowly come out of isolation. We will see a reunion of families that have not been able to hug one another and co-workers returning to offices they were forced to abandon. Further, people will become ready to rescheduled trips and special events, all that will send them shopping to ditch the casual attire for the new fashion of a post-COVID world.
The path to normalcy will not be a straight line or without continued hardships from a financial and healthcare perspective. The global consumption will be enormous, and unfortunately, retailers are not prepared for it. There is a lot of hiring and logistics that needs to be done to get hospitality, restaurants, and entertainment back online. The past few stimulus checks have been predominantly used to pay down debt and save/invest. We expect the next round of checks to be spent and not saved. We expect that some of prior stimulus money that was speculatively invested into many of the bubbles that we discussed in February 2021 will be converted back to cash to be spent.
Our portfolios are well positioned toward the quality companies that will benefit in The Roaring 2020s. An additional portfolio challenge right now is to navigate speculative investing into companies that may have a short-term pop in stock performance but will see long-term hinderance from an abundance of new debt that was required to keep the company survive. Be careful, the hot stocks that couldn’t lose in 2020, may in fact be the under performers in The Roaring 2020s.
A 12 month shipping frenzy has started
Rewind… Back in July 2020 we wrote:
Companies have been working down inventory levels for over a year now. Low to no inventory levels are causing consumers to finally feel the inconvenience of delays on their orders. Even Amazon has had to walk back the ability to do Prime delivery on many items. Something has to give… consumers need to stop buying or the companies need to start stocking up their inventory. We can attest to clients increasing their savings levels and even using the extra savings to pay down debt and invest for the future.
During the balance of 2020, companies pushed their inventory levels even lower. Now faced with a shortage of materials and a backlog of production, it will take the balance of 2021 to get back to normal levels. Container shipping activity is booming and is now surging to the highest levels in four years. These surges are driving transportation costs up as much as twice the prices seen at the end of 2019. The demand is so large, that we are even seeing shipping companies add additional shipping routes to help handle the traffic flow from the surge.
Transient inflation is coming due to the short-term imbalance between materials, labor and transportation versus demand. Inflation will remain high until the global supply chain is fully back up and running. Inflation could further be reduced if Washington reduces certain tariffs (think lumber from Canada).
Washington to the rescue
Whether you agree with it or not, Washington has clearly communicated since April 2020 that we are going to spend our way out of this recession. With an unlimited amount of cash being thrown at the economy, the chances of a double dip recession are virtually zero. The following are a few of the recent financial supports added to the economy.
- $1.9 trillion COVID relief bill passes... While the bill lacked even a hint of bipartisanship, one encouraging tangential aspect of the entire process was that there now seems to be little chance for the Senate to end the filibuster. From an investment perspective, a precedent setting end to the filibuster would result in increased long-term uncertainty as it would result in more major policy changes and the passage of more extreme policy measures from whichever party is in power (in this case the Green New Deal, packing the Supreme Court or the creation of the 51st state).
- Unemployment income news… The federal government will waive taxes on $10,200 of unemployment income per person. Historically, unemployment income is taxable income and often results in a surprising tax bill for the following year. This tax reduction should result in additional money available to be spent into the economy.
- House extends PPP 2.0 deadline… The PPP Extension act of 2021 moves the application deadline back from March 31 to May 31.
- $28.6 billion Restaurant Revitalization Fund (RRF)… The RRF was created under the COVID relief bill to fill the gap in missing revenue from 2019 and 2020 (including PPP proceeds). The goal is to make the restaurant owners financially whole so they can properly prepare for a full reopening.
- Tax deadline is now 5/15/2021… The IRS pushed back the tax filing deadline for 2020 from the traditional April 15 to May 15. The extra time will provide some assistance to businesses which may still be shut down, closed or at limited capacity.
- Student debt forgiveness on the horizon… We are moving closer to the final states of seeing forgiveness of federal student loan balances of $10k-$50k. The details are still being worked out, but the relief would free up consumers to push the prior debt payments towards the housing market, retirement savings and of course spending.
2020/2021 NSAG scholarship winner!
This announcement is a bit delayed due to COVID and other news. Mark Kangas had the opportunity to talk with the 2020/2021 North Star Advisory Group scholarship winner Janae Johnson in January 2021. Janae’s involvement and impact at BGSU exemplifies candidates that NSAG was looking to recognize. The finance department at BGSU makes the selection based on criteria established by NSAG in 2018. The goal is to recognize a student for their academic success and personal involvement in the department and on campus.
In May, she will be joining Eaton corporation across the street from NSAG. We are looking forward to treating her to a summer lunch.
Stock market crash nearby?
Every once in a while we come across some great commentary and research from another firm. We thought we would share the following commentary that LPL Financial sent to North Star in March.
Countless stock investors would prefer to exit their investment precisely at the top and put their money back into the market at the very bottom of a market correction. Avoiding volatility may sound good in theory, but volatility is the price of admission for the stock market, and the challenge of calling tops and bottoms can be an expensive one indeed.
Television, social media, and now websites like Reddit can create noise that can be distracting for investors, which can cause them to lose focus of their timeframe—which for many of us is a long time. Often times this can cause investors to make rash decisions and pull their money from the market even though the market continues to advance.
As shown in the LPL Chart of the Day, there have been a plethora of media headlines over the last 10 years that could have caused someone to get fearful of the near term:
It’s the media’s job to get you to tune in, but it’s your advisor’s job to focus on your long-term goals. Drawdowns and bear markets are part of the path to get there, and limiting the latest shiny object from affecting our decisions is key to any investment strategy.
Despite recording the fastest bear market in history in March 2020, and as difficult of a time as we’ve seen in recent years, looking past the short term when investing in stocks has proven to be the correct decision. With markets trading near all-time highs today, many are concerned that this could be another top. However, history has proven that the returns from all-time highs still tend to be solid over the next 6-12 months.
NSAG is getting a new website
Stay tuned to details next month.
Where will the equity markets go next?
We are seeing a psychological shift in society from despair to hope. More individuals are considering getting the COVID vaccine than were two months ago and many families are planning additional spending as they prepare to settle into a reopening world. In December 2020, we were seeing a growing probability of the S&P 500 hitting 4,200 by the end of the year 2021. The breadth of the recovery we are seeing for the balance of 2021 along with some technical analysis, may see the S&P 500 exceed these numbers. We are now slowly seeing analysts raising their forecast over 4,200. While the path forward will not be a straight line, we expect any pullbacks to be modest and focused on areas of bubbles. The continued rotation from growth to value is likely to continue for at least the next year.
It’s now clear that there is virtually zero risk of a double-dip recession. We still believe we are in a secular bull market, which started in 2010 and typically lasts around 15-20 years.
We are passionately devoted to our clients' families and portfolios. Let us know if you know somebody who would benefit from discovering the North Star difference, or if you just need a few minutes to talk.
As a small business, our staff appreciates your continued trust and support as we all work through these stressful and trying times for our country and world.
Please continue to send in your questions and see if yours gets featured in next month’s Timely Topics.
Mark Kangas, CFP®
CEO, Investment Advisor Representative