February 9, 2021 – CFS Viewpoint – Economic Update Edition
As we enter our second month of 2021 we reflect back at last year’s challenges and some would say the surprise of market gains during 2020 and we look ahead with more optimism for 2021. With the election behind us and a different political administration in place here’s where we think we are going.
We see several factors affecting your money this year. Two of the more impactful factors can be lumped into 2 baskets. The threat of higher taxes and the relief of vaccines coming online.
The Virus is unfortunately still an issue and the challenges of widespread vaccinations of our population are usually the headline story of most news outlets. Whether the “calvary is coming” or there is “light at the end of the tunnel” we all hope for herd immunity and our economy getting back to normal. This will re-open roughly a third of the economy that has been shut down and hurting for close to a year now.
The primary reason the stock market jumped since early November 2020 was the advent of multiple vaccines being approved and more on the way. Simply put, the more people who get vaccinated the more the economy can open.
The re-opening of about a third of the economy will provide a huge boost to businesses of all sorts. Corporate profits are expected to rise by about 30% in 2021 compared to 2020. This is the principal reason stocks have been rising in recent months. The stock market is forward looking.
Vaccines will allow travel, entertainment and recreational activities to regain their footing. This is an enormous part of our economy. When these businesses get back to work many will fly and drive and vacation again. Broadway will re-open and Orlando, Florida bound airplanes and cruise-ships will again be operational.
Oil prices increased in November along with oil/energy stocks. Airlines, cruise lines, hotels, restaurant chains, all saw their stocks gain after vaccines were announced. This is another example of the stock market looking forward and these industries are expected to recover.
It is also likely that the new administration and Congress will pass an additional virus related stimulus. This will help put more money in people’s pockets in the short run and Wall Street likes this idea.
The other side of the coin are the risks out there. What is most important to understand is that most of the risks that are visible and are actively being discussed are already priced into the market. Unfortunately, they do cause people to worry about what they hear day-to-day. Usually when we see the stock market drop it is unpredictable, unavoidable, and it cannot be “side-stepped” and is the result of something that cannot be forecasted 3 or 6 or 9 months ahead of time. So the periodic temporary dips and corrections that many folks worry about are going to unexpectedly happen and we will recover from them and rebound just as history has shown. Many times these rebounds occur faster then originally predicted.
Two of the likeliest challenges that the economic recovery may face is increased taxes and regulations that the new administration may see fit and be able to enact. Both of which raise the cost of doing business and therefore lower company profits. Higher business taxes and higher taxes on capital gains are expected in one form or another. Both will make on our stock investments undoubtedly grow less than they would have if these higher taxes and new regulations were not in place. Over-time the only thing that makes stock prices rise is rising company profits. In the short run we are always seeing a variety of trading and short term speculation moving prices around day-to-day. But that is not investing…that is temporary trading and market timing activity which we do not subscribe to.
As always, we maintain that the twin enemies of investors are market-timing and fear. We understand there are risks and volatility, but patient, diversified, investors – with a timeframe of more than a few years – have rarely been disappointed in the long run.
**As usual this commentary is based solely the opinions of Brian Cassidy, Arnie Magid and Daniel Kelly. Nothing in the above written material is endorsed by, or written by, or provided by Cambridge Investment Research, Inc., or by any other outside party or firm.
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