Poised as we are on the close of 2020, I struggle to sum up in a few words where we are in the financial trends which direct (or impede) the direction of the markets and your portfolios. The objective of this quarterly communication, however, is to share the thoughts which have shaped our recommendations to you over this most challenging and unusual year, and to give you a glimpse of how current thoughts will shape our recommendations in 2021.
In the face of so many negatives: a once in a century pandemic with the economic and employment disruptions it has and will continue to cause, an unprecedented election which unearthed deep and disturbing societal divisions, and the social unrest stemming from both racial and income disparities. In the face of these and many other negatives too numerous to list, we saw a stock market which pushed to new highs and a bond market which remains remarkably calm, offering no signs of concern for either inflation or deflation. What gives?
Most economists agree that the rapid and overwhelming infusion of money into the economy through added Federal Unemployment benefits, direct cash distributions to most taxpayers and the Paycheck Protection Loans program (while not perfect or sufficient) not only saved the economy from spiraling into a depression, but put enough liquidity into our economy to keep consumer spending at or above pre-pandemic levels. The markets responded positively, and investors will likely close the year with better returns than they might have expected earlier on.
In December, however, many of the safeguards put in by the CARES Act, and most of the supplemental unemployment insurance payments will run out. It appears there will be no Congressional attention paid to another round of stimulus before the new Congress is sworn in. This may be a large headwind for this ebullient market in the near term.
Back to the consumer – with incomes down, cash reserves for much of the population depleted, and no prospect for remedial assistance in the next several months, will the 70% of the economy supported by the consumer hold on and hold up? Retailers are gearing up for a very big Holiday shopping season, most of it online. This seems to suggest good news.
Both Manufacturing and Service Sector PMI Indexes (gauges of economic activity) are above 50 which indicates expansion. They seem to be leveling off, but are still starkly above readings of earlier in the year. So, more good news in the present.
The election is over. Whether your guy won or lost, the uncertainty, which the stock market does NOT like, is over. With clearer indications of policy will come the ability to discern the opportunities available given those new policy directions. Again, more good news, this time looking forward.
When we stack up the negatives and compare them to the positives, I believe we should begin to discern why the stock market, which is forward looking, remains elevated. We expect to see a continuing rotation into more reasonably priced manufacturing and “back to work” companies. We also expect growth and technology sectors, the “work and study from home” companies to remain strong, however, even though their rate of growth may slow.
As we look forward to next year, and we imagine the direction of financial and market moves on that horizon, I believe we should consider the possibility of generally softening volatility, low interest rates to remain, slow but steady post pandemic growth of the worldwide economy, all not without a few moments of panic/euphoria thrown into the mix.
I wish you and yours a most wonderful and hopeful Holiday season.
Linda P. Erickson, CFP®
The views stated in this letter are not necessarily the opinion of Cetera Advisor Networks LLC and should not be construed directly or indirectly as an offer to buy or sell any securities mentioned herein. Due to volatility within the markets mentioned, opinions are subject to change with or without notice. Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed. Past performance does not guarantee future results. Investors cannot invest directly in indexes. The performance of any index is not indicative of the performance of any investment and does not take into account the effects of inflation and the fees and expenses associated with investing.
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