First Quarter Investment Commentary 2021
The last year has been one we won’t soon forget. Every section of the country experienced at least one major outbreak of this pandemic. We’ve lived with masks and shutdowns and changes in how we live and how we do business.
To be honest, I used to feel guilty working from home. “Oh, that must be nice.” Several years ago, I took steps to put our entire business, save the bookkeeping system, in the cloud. This meant I could head home early or run errands and continue working from home later. Little did I know that it would save me from a world of grief.
Today, working from home is the new normal. Owners of commercial office space must be shaking in their boots. With so much of our economy can be done remotely, there may not be a need for a big home office for many companies.
Other industries have been hit hard and may not recover. I think it’s safe to say that corporate America is not going to rush to fly executives and technicians and sales people all over the country and the globe. We can just Zoom instead.
Retail shops will also take a permanent hit. My local mall, The Silver City Galleria closed for the pandemic last spring and is currently being torn down. Torn down! There are still signs on Rt24 about potential traffic backups at the exit leading to the mall.
I remember taking my girls there many Friday nights 15 years ago. Slowly but surely, vacancies increased as traffic thinned. A full makeover, including a gym, entertainment center and a state-of-the-art movie theater were unable to stop the tide of store closings.
This will be a scene we see over and over again as we move to in-person to on-line shopping. The pandemic didn’t kill retail businesses - it just accelerated the decline.
Room For Improvement
Other industries have been hit hard but will definitely come roaring back. After a year of sitting at home, most of us are champing at the bit to go out to a restaurant or take a vacation.
The former will likely recover quickly in 2021. As we vaccinate the country, restaurants will open in full-force. Walking around wearing a mask will be a thing of the past. The latter, requiring a bit more planning, may see a slightly slower recovery at first.
International travel will definitely take longer to recover. While the US is vaccinating at record rates, many other regions including most of continental Europe and even Canada, are not faring as well. This means many tourist destinations world-wide will continue to be unavailable.
On the flipside, we could see a huge influx of tourism right here on our shores. Our beaches and national monuments may be filled with folks from other countries like we’ve never seen before as vaccinated people from the rest of the world flock to the safe United States.
Pandemic Upsides
Some industries have flourished during this time. Money that was normally spent on dining out and vacations has been moved over into landscaping, home improvement and other purchases. Over the last year, selling a home with a pool is a benefit instead of a detriment as people realize they can stay-cation instead of vacation.
Leisure is peaking all over. One of the largest pleasure-boat companies in America stopped taking orders for new boats for this season just two weeks ago! We were barely into March and they sold their quota for 2021!
What this means is that, for the most part, most full-time workers are back to work in the US. It seems like we are beyond the times of shutdowns causing our local grocery stores to run out of toilet paper, boneless chicken breasts and other everyday essentials.
We forget how fortunate we are to live in the US. While many of our industries have moved overseas, we still manufacture a large percentage of what we consume right here in the US of A. Shortages that many countries are experiencing because of pandemic issues within export countries and shipping firms aren’t creating the same impact in our daily lives.
What has been true since this country was colonized and carried through the Industrial Revolution continues today. We are a nation rich in natural resources and human capital. The old world of Europe has the human capital but few natural resources. The developing world has many natural resources but not the infrastructure to turn it into finished goods.
As we’ve seen time and time again in the last 250 years, America is best poised to overcome this latest economic challenge. (Although as demographics change we may be seeing the end of this phenomenon - but that’s a topic for another blog another day.)
So How Did We Do?
For the quarter, the stock market, as defined by the S&P 500 has increased 5.75%. For the last 12 months - since near the bottom of the decline, it has gained just over 60%. That just shows how far the market fell in the first quarter of last year.
Last year, the S&P 500 was the king. It recovered very quickly and led most investment categories right through year-end. But 2021 has been a different story.
Year to date, several categories of stock investments are up double-digits, including small and medium sized companies. Real Estate stocks are outperforming the S&P as well. This illustrates the importance of a diversified portfolio. We can take advantage of the disparity of returns over time to help smooth out and increase returns.
The bond market has not fared so well in 2021. As we know, interest rates dropped precipitously last March. The Federal Reserve lowered short-term rates to effectively zero. This meant that money markets, short-term CD’s and savings account rates followed suit soon after.
In the last three months, mid-term rates - those between 5 and 15 years - have risen considerably. The bond market is pushing back against the Fed’s assertion that continued low-rates and continued stimulus is vital to the success of this robust economy.
Wall Street looks to the Fed to indicate economic direction. Yet the double-speak out of Washington will make your head spin.
We saw this in Fed Chair Jerome Powell’s remarks last week. In his testimony, he mentioned that while the economy is doing well, we still need considerable stimulus. He also stated that huge government debt is a problem but we should continue to run massive deficits to fund. . . this growing successful economy.
It appears that Wall Street has had enough. And it’s about time, in my opinion. While the Fed is reluctant to admit to a 2021 rate increase, it would not shock me to see them raise rates one or even two times later this year - forced more by rising interest rates on Wall Street than any specific economic sign.
Of course, there is a downside to higher rates - its effect on the real estate market. Higher rates mean that it is harder for buyers to pay the asking price for a house.
Good!
The pandemic has caused a considerable rise in housing prices. This is a perfect time to consider raising rates and pushing house prices back to 2019 levels. People aren’t going to go bankrupt selling a home for what it was worth 2 years ago.
There is also a shortage of homes for sale. People should be climbing over each other to sell their homes. But because of Covid, many people have put off a move.
With higher interest rates, we will see prices start to fall. That could signal to potential sellers to get in on the action before it’s too late.
With more inventory, coupled with higher rates, the number of buyers per home will drop - ending the bidding wars we are seeing for virtually every home that hits the market.
What's Up With Gas Prices?
You probably have noticed gas prices have risen significantly in the last few months. That’s not a surprise. As the economy recovers, we should expect fuel prices to rise.
We forget that gasoline prices in January of 2020 were only about 20-30 cents lower than where they are today. And traditionally, gasoline prices rise as the weather warms.
Many will say, “Oh yeah. The oil companies know we are going to use more oil and are sticking it to us.”
Oil companies have very little control over the pricing. What really happens is that demand does rise as we reach Summer. Refineries can only produce so much gasoline per month. As demand starts to outstrip supply, prices rise. And as we enter the Fall, prices drop as demand drops.
Beyond all of that, gas prices are still higher than they were in 2019 and early 2020. Some of that is pandemic-related - the Middle East was particularly hard-hit by Covid which has caused continued supply issues world-wide. And some of the increase is related to the shutdown of many US operations due to lower prices last year coupled with some government restrictions with the new administration.
Personally, I suspect that gasoline prices will likely hover around current levels. Gasoline futures have dropped about 15-20 cents in the last couple of weeks so that should ease the pain at the pump.
Going Forward!
So where are we going in 2021? I believe we are headed up. Unemployment numbers continue to improve as we conquer Covid. More Americans working means even greater GDP growth.
If you are like most Americans, you spent most of 2020 and early 2021 sitting in your living room. There are billions, if not trillions of dollars that were not spent last year on vacations and dining out and a myriad of activities. As the economy continues to open up, and as we become more comfortable with the old-normal, that money will be spent very rapidly.
Couple those two together and we could see robust economic growth in 2021 and likely into 2022.
Thanks for taking the time to read our blog this week. If you have any questions or concerns, please don’t hesitate to email us at dennis@successfulmoney.com or call us at (800) 453-3209. If you don’t already have a copy of my book, The Biggest Financial Mistakes Retirees Make, you can order it on Amazon or click here and we will get a copy out to you, free of charge!
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This blog is the opinion of Successful Money Strategies, Inc. and is provided for informational purposes only and is not intended to provide any investment advice or service. Statistics and other figures are accurate at the time of original publishing. Any advice herein should not be acted upon without obtaining specific advice from a licensed professional regarding the readers own situation or concerns. Always count your change.