Welcome, 2021! Your Arrival is Greeted with Open Arms
As we turn the calendar on a very challenging 2020, it’s a good time to reflect on the events that impacted our wealth management decisions and strategies, and how we can use this information to help us make great choices in the year ahead. Similarly, we are looking forward to our future and how the political, economic, and market environment may guide our decisions.
On the political scene, polarization will continue. While it is expected there will be renewed regulations and taxes that could serve as a headwind to the markets, they may occur slower than people expect. There is also a greater chance of stimulus and infrastructure spending, but again it will not be a fast process. Much of the activity in domestic politics may reside in the category of rhetorical infighting as both parties more centrist members fight their more radical colleagues for control over their respective parties. Often, the result of this power struggle is an absence of change. Which, coincidentally, the markets appreciate.
Another government entity that certainly does have a direct impact on the markets is the Federal Reserve. The future of interest rates, which are still at historic lows, will influence where money and investments flow. Currently, the Federal Reserve has indicated they have no appetite to raise rates. With the unemployment rate still high and our GDP recovering, any increase in rates would likely stall the recovery. Fed Chair Jerome Powell recently stated, “We’re honest with ourselves and with you… but even with the very high level of accommodation that we’re providing both through low rates and very high levels of asset purchases, it will take some time (to recover).”
With this reality of persistently low-interest rates, we are continuing to focus our attention on income-generating investment strategies that include both fixed income instruments as well as alternatives. We also see continued opportunities for our clients to reduce debt costs through refinances and utilize our banking arrangements to finance purchases at very low-interest rates.
Over the past several weeks, as the efficacy of the new COVID vaccine was revealed, the market has surged in anticipation of a return to normal economic conditions. While we fully expect this trend to continue, we are going to be watching closely how the distribution of the vaccine is executed and what impact this has on overall cases, hospitalizations, and deaths. Of course, our foremost concern is the health and safety of all, but any setback could cause the market to negatively react. We will be prepared.
If all goes as planned, we anticipate the rotation to continue in investment flow from Large Cap Domestic Growth to Value and smaller capitalization. Over the previous 90-days, the broad market is out-performing the heavily weighted indexes like the S&P 500, Dow Jones, and NASDAQ by a significant margin. This is a reversal of those indexes dominating stock returns over the past several years. This unwinding of valuation differential was years in the making and could take many quarters to normalize. Our investment committee has been monitoring these trends and adjusting accordingly.
Other items of interest for the coming year include the 5G rollout. This high-speed resource will be valuable for all countries moving forward. However, we expect it to become a hotly debated political topic both domestically and internationally as both China and the U.S. want to control standards and security. Also, we expect to see more clarity from corporations regarding the trajectory of work-from-home practices. While we may not see significant changes in American work habits until later in the year, telecommuting shifts could significantly change the workplace economy.
The resolution of the challenges our country is facing is certainly not dictated by the turning of the calendar to a new year. However, we do see brighter days ahead. 2021 may reveal new challenges, in fact, we expect them. But with all conditions, good or bad, we have plans in place to meet the needs of our clients and are ready to make adjustments as needed.