January 2021 – Looking Forward

Happy New Year to you and your family!

A new year offers a welcomed turn of the calendar, a time to reflect on the previous year’s challenges, relish our achievements and focus on the new year ahead.

In November’s note, I mentioned our 2021 year-end S&P 500 index target is 4,300 through 4,600 or roughly 12% higher than where the index is trading today. We still have conviction behind our estimated target despite the slower than expected Covid-19 vaccine rollout.

As we look forward, it is important to remember where we’ve been and the tremendous progress the US economy has made in its recovery so far:

Quantitative data of note:

  • The US economy has created more than 12 million jobs since April 2020—more than half the number of jobs lost during the spring lockdown -and has brought down the unemployment rate from 14.7% in April to 6.7% in December.
  • Holiday shopping was better than expected, with a 3% year over year gain according to MasterCard data and it should not be a surprise that a 49% increase in online sales was the biggest driver. This growth is impressive when we remember how different the world looked in late 2019 when businesses were fully open without restrictions, shoppers freely visited brick-and-mortar stores, and unemployment was near record lows.
  • The manufacturing sector has and is staging a strong recovery. The Institute for Supply Management (ISM) manufacturing index in December tied for its second highest reading in 15 years and has registered above 50— the dividing line between expansion and contraction—for seven straight months.

Qualitative data of note:

  • U.S. consumer debt payments as a % of disposable personal income are currently at 40-year lows and U.S. household net worth is at an all time high -meaning the average American household was in good to great financial health going into this pandemic and has helped bridge the gap coming out.
  • In late March of 2020, the Federal Reserve took unprecedented action by providing monetary support to markets by reducing interest rates to zero, providing ample liquidity to bond markets and pledging further support into 2023. In short, this is a boon for equities and neutral to negative for bonds going forward.
  • Fiscal Policy has stepped up in a big way by the passing of the CARES Act, which provided $2.2 trillion dollars in economic stimulus -with much of the money finding its way into the equities markets. In December, another $900 billion was approved and the Biden Administration is now looking to pass another $1.9 trillion dollar stimulus plan in the coming months.

Remember, American household debt is at a 40-year low while net worth is at an all time high -much of this economic stimulus will become disposable income and ultimately find its way into stocks and bonds, adding further support to market valuations -if not goosing valuations higher. In other words, the government is flooding the system with unprecedented amounts of cash and ultimately it will be spent, saved or invested.

  • 2020 Fourth Quarter earnings kicked off late last week and the bar has been set so low for corporate earnings that I believe we will see a vast majority of companies beat earnings expectations. As of the close business today (Friday, January 22nd, 2021) 87% of companies that have reported have beaten earnings expectations by an average of 19%. This will add further support to equity valuations.

On a granular asset allocation level, our portfolios have not only weathered the 2020 storm but have truly flourished. We owe this in part to the technology revolution that continues to accelerate. As the global pandemic forced the shutdown of economies around the world, a significant number of companies were able to maintain operations and adapt to the new remote environment.

They did so by offering technological advancements that promote digital productivity and conquer distance through innovations in cloud technology, artificial intelligence and virtual empowerment. These events highlight the power of the technology revolution which has essentially kept the economy moving during the crisis. Companies such as Apple, Microsoft, Amazon, Qualcomm, Nvidia, AMD and Zoom Communications come to mind, and we’ve owned these companies individually for years. Innovation is marked by formidable, long-lasting trends; and we will continue our exposure to those trends within our portfolios.

Tactically, we are in the process of rebalancing portfolio allocations -mainly trimming portfolio holdings in the areas of growth and utilizing those proceeds to raise our exposure to value which has lagged substantially in 2020 but should benefit in 2021 as our economy recovers from the virus.

In closing, we remain positive and hopeful that 2021 will be good year for investors and our economy. As vaccination efforts ramp up, sentiment will as well. 2020 humbled us all in one way or another but that’s in the rear-view mirror now and we’re looking forward.

We wish you a great Friday evening, an enjoyable weekend.

As always, please reach out to us with any questions or comments you may have regarding your specific situation.

Jaran Day Chief Investment Officer

Griffin Dalrymple, CFP®, Chief Strategy Officer