In so many ways we are all too ready to put the 2020 year in our rear-view mirror and then tear the mirror off the windshield. Yet, from a financial market standpoint, it was as if the news of the Corona Virus pandemic was never made known. Interest rates plummeted from a low starting point, the stock market after falling off the cliff, began a rapid ascent with rarely a look back to the news that caused the drop in the first place. What a year!
We often talk about economic growth, using Gross Domestic Product – GDP – as a measuring stick, when we forecast the year ahead. We are going to forego such a reference as this year will undoubtedly have another unusual path to its endpoint. We expect the first six months to be marked by a tepid economic recovery but punctuated by stimulative efforts from the Federal government. Federal relief/stimulative efforts just got made easier by the Georgia Senate election runoff and we would expect both direct money and other Federal-aid/programs to be announced early in Biden’s administration.
We anticipate the back half of the year to see an increase in economic activity and for that activity to widen and include travel, restaurants, and other areas so severely hit by the pandemic. It is our view that employment will be slower to recover as businesses will tend to have a keener focus on efficiencies and be more discerning in their hiring plans.
Interest rates have been on a wild ride over the past year. At the end of 2019, the U.S. Treasury 10 ten-year note had a yield of 1.92%. On March 9th, just over two months later, the yield had fallen to the low for the year - .54%! We finished the 2020 year with a yield of .93% for the 10-year Treasury note.
As we do almost every year, we look for interest rates to move higher over the course of the year. Higher interest rates will be somewhat constrained by a sluggish economic lift-off and higher unemployment; but we anticipate the flood of government aid, an improving economic environment and a recognition of the enormity of our Federal debt to be forces that push rates higher – we think by year-end we will see the ten-year yield in the range of 1.25-1.50%.
The stock market did not have a good year, it had a great year! The increase was most prominent among a relatively few larger companies for the bulk of the year, with the fourth quarter bringing a broader move into the mid and smaller companies' stock prices. We forecasted stock prices to move up by 7-10% for the year – instead, they posted a return in the upper teens.
We made a strategic move at the end of the first quarter of 2020 to significantly decrease our exposure to the international markets while increasing our positions in the large-cap US-based companies, the health care and financial industries. We also added several individual company positions to our larger portfolios in the form of JP Morgan, Google, Amazon, Square, Disney, and maintaining our position in GE. The changes we made to the portfolios were beneficial for the year and we believe there is more juice left in them. We will most likely do some more tweaking to our investment positions as the year progresses with a few more individual companies and some industry-specific additions.
We believe stocks will continue to move higher – the primary reason is the fuel for a higher move is still extremely abundant. The U.S. Federal Reserve is steadily injecting money into the system through Quantitative Easing – a fancy term for money printing – and the purchase of longer-term bonds, this is the rocket fuel for higher stock prices. While we believe interest rates will move higher, we do not believe they will move fast enough to thwart the move higher for stock prices. As long as the money spigot remains fully open, it will be hard for the stock market to experience a meaningful longer-term correction. The easy money should continue through the first half of the year – then it could get a little exciting for stock prices.
The new year has arrived – it is our hope and prayer that it will bring with it healing for all of us in every manner that we may need it on an individual, family, community, and country basis.
Thank you for the opportunity to work with you!