March Update, 2021: Counting Your Chickens

Investors collectively continue to have a positive bias towards their assessment of economic progress, and by extension, this continues to be reflected in generally rising stock market valuations. This is good news indeed, and we fully encourage a positive bias in the longer-term.

There is good reason for optimism about a continuing economic recovery. The U.S. government is about to shower the economy with $1,400 cheques. This is the third spoonful of cookie dough (money) the government has fed a hungry population frustrated by the effects of COVID-19. The first round of cheques was for $1,200 and rained down on the economy during April and May of 2020. The second round of $600 cheques was sprinkled during January of this year. The third deluge will fall later this month. There is now chatter that the newly elected President plans on a $2.5 trillion infrastructure spending bill to ‘rebuild’ America. A lot of money is being pushed around.

American citizens for the most part parked their cheques in the bank and clearly some have discovered the stock market. The savings rate of American citizens has soared. $3.5 trillion is sitting in consumer bank accounts waiting to find a new owner just as soon as they can get out of the house. They are collectively sitting on a powder keg of money waiting for the bell to ring all clear. Investors are licking their lips in anticipation of the great re-opening, counting their nest eggs with visions of a great feast and of continued profits as consumers flee their homes.

Counting your chickens before they are hatched?

There is growing debate and sensitivity toward the merit of continued government stimulation of the economy via massive stimulus cheques, support payments, subsidies, and bailouts. Interest rates have been increasing at a rapid rate recently. Investors’ lending money to profligate governments, promising free lunches, brings back memories of rampant inflation. Many worry that adding more money to a building pile of pent-up consumer spending plans could unleash runaway price increases. We wrote about this concern in our last update, and since then investor angst has only increased. Inflation, or fears of rising inflation, causes investors to demand higher interest rates to compensate them for the risks of inflation eating into their fixed interest payments and maturity values. Rising interest rates are also viewed poorly by the stock market as investors usually prefer guaranteed returns to unknown returns in volatile stocks.

As always, too much good news, too much spending, and too much optimism could be bad for stocks. Those golden eggs could be scrambled by bond market vigilantes dumping bonds or worse, not financing the government spending that is boosting the economy, and by extension, stock markets.

Stock market volatility has increased recently as investors cautiously assess the latest economic numbers (which continue to improve) looking for signs of inflation. Investors are also keenly listening to central banks who continue to downplay risks of inflation. It is a game of confidence. Some would argue it is a game of musical chairs.

The basket is full of eggs, and while some may spill out, the basket is safe.

We continue to think that the bulk of the increase in interest rates has likely occurred for the year, and we agree with the consensus that while inflation will bubble up, it will be a temporary burp. It’s likely indigestion and not a heart attack.

Underneath the surface a great deal of turmoil is apparent in the stock market. Your investments operating in economically sensitive areas of the economy continue to behave increasingly well. Bank stocks are hitting new highs daily. Industrial companies continue to show improvements. Walt Disney continues to delight with soaring subscriptions in Disney+ and its parks should be busy again soon. These stocks were a drag on performance last year and now they are the engine of growth. The leaders of last year; those great long-term growers (Amazon, Apple, Google, Microsoft, Facebook) are pausing and catching their breath, all the while their profits are building. Health care stocks have paused too as investors consider the impacts of too much good health on their bottom line. Day traders jump from one group to another. We continue to stick to our knitting, seeing the benefits of a well-diversified portfolio of world class companies, all picked to provide consistent long-term growth.

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