Marks Group would like to express our thanks to clients and families we work with for your understanding and flexibility to adapt to the new realities brought upon us by COVID-19. All meetings will continue to be conducted via phone call or video conference until further notice. Our Minnetonka office remains closed to visitors, but is consistently staffed during regular business hours by a handful of dedicated Marks Group team members. The rest of our advisors and staff are working from home. While it’s unfortunate we are unable to meet face-to-face for the time being, you can rest assured all operations are running at full capacity. If you have specific questions, please do not hesitate to contact us directly.
Ben Marks, Chief Investment Officer
January 21, 2021
As investors and as Americans, the past ten months have been historic. The global pandemic led to dramatic societal changes. Some are temporary. Others will be permanent. Being a glass-half-full kind of guy, I see a prosperous post-pandemic world, driven by innovation.
The stock market – always forward looking – appears to agree, as it’s trading near all-time highs. We can thank the extraordinary monetary and fiscal response by the US Government. When the S&P 500 fell 34% last spring, the Federal Reserve swiftly dropped short-term interest rates to zero and broadcasted they would do “whatever it takes” to prevent a prolonged economic downturn.
What ensued was an unprecedented response that increased the broad money supply by 25% last year, a peacetime record. Congress passed the $2 trillion CARES Act, which sent $1,200 checks to most Americans, expanded Federal unemployment benefits, and offered forgivable loans to businesses impacted by the pandemic. That was followed by a second $900 million stimulus package in December, and plans are already in the works for a third $2 trillion stimulus bill in the months ahead.
Our country is recovering from a recession, although for anyone fortunate enough to remain employed, it hardly felt like one. The US savings rate is the highest it’s been in decades, home prices appreciated by double digits last year, and the average employee 401(k) balance increased significantly from a year earlier.
For most of 2020, the market was dominated by a handful of mega-cap technology stocks with business models immune to the virus-induced recession. In early October, when trials revealed COVID-19 vaccines were nearly 100% effective at eliminating serious disease, investors saw the light at the end of the tunnel. This ignited an impressive year-end rally, led by depressed cyclical stocks.
Where do we go from here? Investors are optimistic the majority of Americans will be vaccinated by summer and that life will return to something resembling normal this fall. Money printing and deficit spending have led stocks to trade at historically high valuations relative to earnings. As the economy re-opens, earnings expectations will likely rise, making the market less expensive than it currently appears. During my 39-year career, the stock market has closed higher 79% of the time. Given that statistic, I can safely say the path of least resistance for stocks is to move higher, even from current levels. That said, most years during my career also included at least a 10% correction in equity prices, so prepare yourself for some turbulence along the way.
The Federal Reserve has been attempting to boost the inflation rate for years. The aftermath of a global pandemic might finally be the impetus. The most recent inflation number only printed 1.6%, but the velocity of money in our economy is unusually low. When consumers feel it is safe to eat at restaurants; when families feel comfortable booking trips; when entrepreneurs feel confident enough to expand their businesses; money will again flow through the economy at an accelerated pace. This could lead to an imbalance in the most basic of economic relationships: Supply and demand. Already, automobile manufacturers and cell phone producers have announced production delays due to shortages in computer chips. Constricted lumber supplies caused prices to increase 130% in 2020, driving up the cost of new home construction. Many vacation resorts are no longer in operation and it could take years for that capacity to return. Plan on making dinner reservations far in advance. Many restaurants permanently closed during the pandemic.
The Fed has made it abundantly clear they will allow inflation to run well above their 2% long-term target before hitting the brakes. Eventually, when full employment is reached, the Fed will begin to tighten its policy. That will create a headwind for equities. For now, we look forward to a fresh start to a new year that hopefully delivers more good news than disappointments.
We recently welcomed another new member to Marks Group. Valerie Griffin joined our Client Service team last month and has hit the ground running. We are fortunate to add her skillset and look forward to our clients getting to know her better in the months ahead.
Best wishes for a healthy and prosperous 2021.
Be well and stay strong,
Ben Marks, Chief Investment Officer
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. Stock prices and index returns provided by E-signal.