May the New Year bring better times and some level of normalcy back to the world! 2020 was indeed challenging in many respects and a year for the record books to be analyzed and written about for many years to come! Fortunately, 2020 ended on a more positive note with the development of several high efficacy vaccines along with another relief package001 to help small businesses and the many millions still unemployed.
Post-election turmoil continued into 2021 culminating with a siege on the Capitol to disrupt the constitutional transfer of power, which swiftly lead to a 2nd impeachment of President Trump. Given how Social Media was used to fan the flames of social unrest and discontent, regulation in regards to Section 230 of the Communications Decency Act002 of 1996 will likely be an on-going discussion.
The new administration confronts the daunting task of fixing the nation’s ailing economy003 while the pandemic surges, which will be a major focus for the 1st 100 days of the new administration. Because of surging COVID, a number of countries have implemented another round of economic lockdowns. Hopefully, the recently approved relief package will carry the limping economy through the first quarter while vaccines are rapidly deployed.
It’s expected that the new administration will quickly tackle tariff issues and propose an infrastructure package, which can help hasten the economic recovery. The new administration rejoined the World Health Organization and the Paris Climate accord004 and will reconsider other treaties, such as the Open Skies and Nuclear Arms Control treaty, and many others. Also, taxation and deficits will likely be on-going discussions.
Central banks around the world flooded markets with liquidity005 to support their respective economies and stave off steeper recessions. The FED expects interest rates to remain low006 through 2023 even if inflation picks up a bit. Risk markets celebrated the Janet Yellen appointment as Treasury Secretary007 who is uniquely qualified to tackle current challenges. An undesirable side effect of this pandemic will be larger deficits, which DO matter and are NOT good for our country over the long haul but are manageable in the low interest rate environment.
There’s a distinct disconnect between Wall Street, which is hitting new all-time highs, while Main Street008 struggles with higher unemployment still down about 10 million jobs009 since the onset of the pandemic. At the current pace of improvement, the job market may not return to its pre-pandemic level until 2024010. Unemployment may remain stubbornly high from a wave of small business bankruptcies011 and layoffs from municipalities, which struggle from lost revenue and higher COVID related expenses. However, state and local governments may get some relief from the new administration.
The S&P 500012 cascaded lower for the fastest 30% decline013 in history only to be followed by a liquidity driven melt up with the biggest 100-trading day rise014 since 1933. The meteoric rise015 in a handful of high flying tech juggernauts has taken the index to new all-time highs. Stocks that benefitted from work-from-home, remote education and social distancing measures experienced incredible growth and have high valuations with challenging year-over-year earnings comparisons reminiscent of the late 90’s Y2K market. The long awaited rotation from growth to value016 may finally be at hand with a rotation into undervalued sectors.
Online commerce and the virtual workplace became much more prevalent as a result of shelter-in-place mandates, which benefits some properties, while hurting others, such as retail and leisure properties. Because the forced transition to a virtual workplace has gone relatively smoothly, some CEOs may re-evaluate the benefits&drawbacks017 of the virtual office and employees working remotely. Fortunately for landlords, Commercial Office space is usually under multi-year lease018 contracts, of five years or more on average, with cancellation penalty clauses. Vacancy rates may creep higher as leases come up for renewal. However, if large companies go bankrupt en masse, which is NOT anticipated, that would lead to increased vacancy rates019.
Because of tariff inflicted supply chain problems019 further exacerbated by COVID, corporations may alter supply chains between countries and possibly even continents. Corporations may consider switching from just-in-time to just-in-case inventoryto shun fragile business models020 as well as sourcing some supply production domestically. Changes to corporate supply chains in regard to where products are sourced will benefit production facilities and warehousing properties as well as increase employment associated with those activities. These changes will have long lasting implications but take time to implement.
Hopefully, as vaccines are more fully deployed, the world will hopefully return to some semblance of normalcy. A sustainable global economic recovery depends on consumer confidence and their willingness to resume activities to unleash pent-up demand. We’re cautiously optimistic but with uncertain corporate earnings, complacency & stretched valuations021, Caution is thewatchword! The best defense during times like this is a highly diversified portfolio, which is a risk management strategy022.
If you have any questions and/or concerns about last year’s market volatility, a member of the Iron Belt Partners Team will gladly discuss any concerns with you. Our contact information is:
Lindsay M. Turchetta lturchetta@wradvisors.com (724) 493-9473
John D. Martin JDMartin@wradvisors.com (412) 925-72031
Working as a team in an effort to better serve our clients!
This communication is meant to be general in nature and should not be construed as investment or financial advice related to your personal situation. You should consult your tax, legal, and/or financial advisor prior to making any financial decisions. The views expressed here are those of the authors, John Martin & Lindsay Turchetta, and not necessarily those of Waddell & Reed. Information is based on data gathered from what are believed to be reliable sources. The opinions, and other information contained in this article are subject to change continually and without notice of any kind. Forward-looking statements are subject to numerous assumptions, risks, and uncertainties, which change over time and may not come to pass. Past performance does not guarantee future results.
Investments are not guaranteed and are subject to investment risk including the possible loss of principal.
The index references herein are unmanaged and cannot be directly invested into. Past performance does not guarantee future results.
Iron Belt Partners is a name used by independent advisors associated with LPL Financial.
001 Source: “Congress Reaches Agreement on new COVID Legislation” on forbes.com by Mark Kantrowitz
002 Source: “The consequences of social media’s giant experiment” on brookings.edu
003 Source: “What will determine a new stimulus plan” on bgr.com by Andy Meek
004 Source: “U.S. Rejoins World Health Organization and Paris Climate Agreement” on mymodernmet.com by Madeleine Muzdakis
005 Source: “Central Banks have flooded global markets with liquidity” on ROCHFORD-group.com
006 Source: “FED expects interest rates to stay near zero through 2023” on cbs.com by Irina Ivanona
007 Source: “Janet Yellen at Treasury is one of Biden’s best appointments” on thenation.com by Marshall Auerback
008 Source: “Market is widening disconnect between wall Street and Main Street” on finance.yahoo.com by Alexis Christoforous&Sam Stoval
009 Source: “Labor market weakness could last for several years in pandemic’s wake” on finance.yahoo.com by Emily McCormick
010 Source: “US Jobs growth slows in November as coronavirus surge threatens recovery” on foxbusiness.com by Megan Henney
011 Source: “A Tidal Wave of Bankruptcies Is Coming” on nytimes.com by Mary Williams Walsh
012 The S&P 500 is an unmanaged index that cannot be directly invested into. Past performance does not guarantee future results.
013 Source: “The Pros and Cons of Virtual Offices” on business.com
014 Source: “The stock market hasn’t seen a 100-day gain this strong since 1933” on Marketwatch.com by William Watts
015 Source: “Market outlook: What’s next after a sharp fall and a meteoric rise” on business-standard.com by Deepsak Jasani
016 Source: “JPMorgan quant guru says the long-awaited rotation into value stocks is here to stay” on businessinsider.com by Emily Graffeo
017 Source: “Understanding the Pros and Cons of Virtual Office Spaces: Part 1 & Part 2” on stat.international
018 Source: “What does COVID mean for Commercial Real Estate?” on geophy.com by Nils Kok
019 Source: “The United States Needs to Reshape Global Supply Chains” on foreignpolicy.com by Aaron Friedberg
020 Source: “Just-in-time vs “just-in-case parts inventory management” on acumentfl.com
021 Source: “Stock Market valuations is extraordinarily high” on cnbc.com by Fred Imbert
022 Rebalancing, diversification and asset allocation strategies do not assure a profit or protect against loss in declining markets. They are methods used to help manage portfolio risk. Also, rebalancing may have fees and tax consequences so please consult with a tax and financial advisor prior to making financial decisions. There is no assurance that any investment strategy will be successful. Investing involves risk and investors may incur a profit or a loss.