Happy 2021. Given growing concerns of potential market fluctuations mainly pertaining to administration changes and the ‘fun’ associated to GameStop and the famed Reddit-trading-army we felt it would be a good time to update you on our perspective of the broad market. In respect to the Game Stop and Reddit situation, you can find my full blog post outlining what went down and what this might mean for the broad market HERE.
Political and Fundamental Perspective
The Biden administration has assumed control during one of the most polarizing political environments most of us have ever endured.
However, my perspective has changed very little over the last decade. Despite what our ‘news’ is feeding us, I find that most people are more alike than different, agree more than they disagree and actually desire to move toward a positive outcome for EVERYONE than to tear down “the other side”.
Fundamentally speaking, we feel most signs point north. The biggest fundamental impact comes from the Trump administration printing an unprecedented amount of money in 2020 to keep things afloat amidst the initial pandemic restrictions. Whereby, the FED increased the money supply by 21.5% through Quantitative Easing (QE) efforts – from $15.5 trillion in February 2020 to $18.84 trillion in October 2020. Which was infused into the market via PP loans, SBA loans and the purchasing of various forms of corporate debt throughout the year. Additionally, here comes the Biden gang gearing up for another $1.9 trillion to start things off. QE in its various forms is expected to continue through 2023.
We can think of this quite simply. There’s been 21.5% more financial capital injected into the market and, therefore, the market and its counterparts will inflate by 21.5%. More supply equals, well, more supply. And, again, here comes another $1.9 trillion only adding to the bloat.
This will undoubtedly create growth and valuation shifts systemically throughout the market, most of which still remain to be seen. Companies that have provided needed services during the pandemic have experienced tremendous growth – mainly communication and technology companies. Some of which I am both grateful to and resentful of: Amazon. Those unable to offer their product or service due to restrictions have experienced some serious losses. Unfortunately, those affected most negatively seem to be small businesses – a conversation best left for another blog post. However, important to note as we have seen monopolization become much more prevalent in the aforementioned instances (Amazon along with many others).
The continued printing of capital – quantitative easing – certainly has its drawbacks. For one, the deficit is inflating to unthinkable numbers, the consequences of which will be beared by generations to come. Additionally, there’s the potential of further devaluing our currency. While a devalued currency can help domestic manufacturers because exported goods are cheaper in the global market (and this may help stimulate growth), a falling currency value makes imports more expensive potentially hindering growth. However, this could also invigorate domestic production and use of domestic products over imported goods. It’s all a very delicate balance. Regardless, we have already devalued our currency – one dollar was worth .92 Euro in March of 2020. And, currently, one dollar is worth .83 Euro.
On a final, speculative note – I see an economy and a society foaming at the mouth to get out of their homes and spend money. People are desperate to return to their normal lives, to have a nice meal out with family and friends, go on vacation, or just wander around town. With the capital that has been injected into the economy and that which is still to come, I foresee a robust economy emerging post-pandemic restrictions.
Technical Perspective
The market has largely been in a contraction period since early 2018 where we watched large swings in values as smart traders found great gains, poor traders found losses while “buy-and-hold” investors simply collected dividends. The Trump era was a volatile one but, ultimately, ended on a high note (for the market that is).
Presently, we are experiencing an expansion move – a move higher – in the markets driven by the technology sector. Technology continues to be a safe haven for investors as the FED continues their QE efforts through 2023.
We typically find that when the market faces systemic risk there is an overwhelming increase in bond holdings – but that’s not the case right now. Money is easy to borrow, with low rates and, seemingly, institutional investors are allocating their assets to equity growth, not protective strategies. Another good indicator that we’ll see values continue to drive higher.
With the S&P 500 currently hovering over the 3800 range we feel confident in this expansion move as long as it remains over the 3600 range. Falling below this range would result in our allocations shifting for our Conscious Investing strategy – decreasing our exposure and retaining higher levels of cash, cash equivalents, and other instruments that may, in fact, experience an inverse effect to that of the broad market.
Companies that have pivoted or were already providing value for a work-from-home-economy have generated tremendous returns during this time. We have been, and will continue to, partake in this growth until the trend deteriorates or the FED stops QE efforts.
When we reflect on what QE did for the 2008 Great Recession – we find that the majority of growth came in 2010-2013.. Now, we have not endured the same negative systemic effects as 2008 – we caught this early and started printing money before anything took too big of a hit – so we should experience the result of QE in a much shorter duration as long as we don’t see heavy Covid restrictions prevail through 2022.
Final thoughts
Given the financial bloat from QE and technical markers indicating a continued expansionary period we foresee continued growth in the short to medium-term. We know it’s not 2020 anymore, but 2020 certainly taught us that anything can happen. So we’ll keep you updated as we walk the path.
As always, we’d love to hear from you. If you have questions, reach out to us directly at info@allonewealth.com
Cheers,
Mark Sauer, CEO
Other contributing Members: CIO, Christian Carreon
