First my apologies for this being our blog of 2021, a full month into the new year. While we have been very busy since late December here at the office, the real reason I’ve procrastinated is that every time I start writing, something new happens that makes me question my outlook.
Over the years I’ve posted a yearly outlook. Overall, I think I’ve done pretty well with my biggest success being bucking the consensus for nearly 12 years that interest rates would rise. I haven’t seen any reason for higher interest rates, until now…maybe. And that “maybe” is a big source of uncertainty as we look ahead. There are so many forces tugging at the economy, the big three being, COVID, a flood of money, and the strong likelihood of increasing taxes, if President Biden is true to his campaign promise of repealing the Trump Tax Cuts. And thus, the title for this post, whichever influences the economy the most will determine if 2021 ends up being good, bad, or ugly.
We’ll go in reverse order as I hate to end on a negative note.
The Ugly - COVID
More than anything, this year will be determined by how the COVID pandemic plays out. While the December rally was on the heels of good vaccine news, reality hit in January. Vaccines will not be available to the entire population until at least mid-summer. There just isn’t enough production capacity until Johnson and Johnson begins mass production. Not a huge problem unless the mutations that we are seeing continue and prove to be resistant to the vaccines. Potential new strains of faster spreading viruses that are vaccine resistant will prove to be a headwind the economy can’t overcome. I don’t think we want to see a return to shutdowns. This threat will hang over the stock market until we are reassured that the new mutations do not pose any greater risk. Unfortunately, every time the virus is spread from one person to the next, it presents an opportunity for a mutation. This a real concern.
The Bad - Taxes
President Biden campaigned on repealing all of President Trump’s tax cuts. They want to raise the minimum wage. He’s canceled the Keystone XL pipeline and put on hold any oil activity on Federal lands. He’s also signed more executive orders than either of his last two predecessors, mostly reinstating regulations that President Trump had eliminated. Based on his appointees this administration has a progressive agenda. Politically we all have our opinions on whether this will make us better or worse. But economically, there is no question it all would have a negative impact on our economy. The administration moving too fast with its agenda could be the catalyst for the next big market crash.
The Good - Stimulus
The other extreme is the amount of money that has been and will continue to be pumped into the economy. The US savings rate skyrocketed last year, banks are flush with cash, and more stimulus is coming. If COVID stays under control, states continue to loosen restrictions on businesses and travel, and there exists a huge amount of consumer pent up demand, the economy could explode in the third quarter. It would certainly feel good to see a 4% or 5% GDP growth number by the end of summer! The only worry, and it is our biggest concern, is that it gets too good. Loose money and free-spending could start to push up inflation. Rising interest rates will crush the market as assuredly as another COVID wave. But that would likely be a problem for 2022.
The Bottom Line
The stock market is showing all the signs of a last gasp bull run. Depending on how all of the above play out will determine of 2021 will be good, bad or ugly. We could get one last big bull push to a new high for the year. We could see a market that is looking for an excuse to sell off finds one and we end up with a crash as bad as last year, but takes more than a couple of months (more like a couple of years) to recover from.
We are positioned to be cautious this year. Market tops are not the time to be greedy. We hope to have solid returns if the markets grind higher but will actively use hedges and cash when we see weakness as well.
Good luck, be safe and let's hope we can put COVID behind us before the end 2021.