There is so much good news to report this month that I am bewildered by the overall tone of the news you read every day. I guess it has become so commonplace to be negative that people just cannot see the good from the bad, so this month I would like to talk about things that I believe you would be interested in and my projections regarding the U.S. economy. I will discuss the extraordinarily good news regarding housing in the U.S, the pent-up demand that will come at the end of the pandemic and will stun you with the current earnings of Big Tech in America today. I will also give you a heads up on the inflation that is coming and its causes, and the extraordinarily good news regarding the economy. It is hard to keep down the excitement as we see the economy shift from a total shutdown to accelerating and growing again.
I also must discuss the facts regarding the pandemic and what the scientists told us. All of this affects the economy in a way that should get you excited about the upcoming year. We finished the year 2020 with one of the best financial years of all time. A gain of 18.4% is certainly something to be proud of in a pandemic. Given the extraordinary circumstances of 2020, who would ever have expected that the stock market performance could be one of the best. I have so much to report on and so little space, I guess I need to get started.
Ava on her first day of school in 2013 and in 2021 – they grow up so fast!
As I always do before discussing more interesting things, I need to give you the scorecard for the stock market for the month of January 2021. The S&P 500 was down 1.0% for the month of January, however its one-year return is still excellent at 17.3%. The NASDAQ Composite was up 1.5% during January and its one-year performance is at 44.1%. The Dow Jones Industrial Average was down 2% for the month of January, but up 8.5% for the one-year period. Just as a basis of comparison, the Bloomberg Barclays Aggregate Bond Index was down 0.7% for the month of January and has a one-year return of 4.9%.
It is hard to believe that we are not even at the one-year anniversary of the true start of the pandemic. So much has happened over the last year, it is hard to believe it has only been 12 short months, seems much longer. As I wrote in the first quarter of 2020, to solve the issue of the pandemic we need to turn loose the American Spirit and let corporate America solve the issue of this current virus which turned into a pandemic. In this short one-year period, we saw our Federal government step up and fund research that led to vaccinations being approved at a record pace. Even though we are not at the one-year anniversary, during this one-year period we not only created and tested a vaccine, we rolled it out to many Americans.
As I write this posting, there have been 42.4 million Americans already vaccinated for the virus. In addition, there have been roughly 27 million cases in the United States. With a combination of the two, we have roughly 69 million Americans that already have some form of protection from the virus continuing to spread. Whether you realize it or not, just a short 6 weeks have elapsed since the first vaccination and we already have close to 20% of the U.S. population that has some sort of protection from additional spread. This is a remarkable rollout by anyone’s definition. Whatever the newspapers and television media are talking about – I have no idea.
But the best part is only beginning. This morning Pfizer announced that they were increasing their production of vaccines by a full 50%. Johnson & Johnson will receive their emergency approval of their vaccination this month. By some accounts, there are roughly 15 additional vaccinations in the final stages of approval. We will have more than enough supply; the implementation will be the challenge. What is even more fascinating to me is that, as of today, there are 20 million doses of the vaccine sitting on shelves that have yet to be administered. We are currently vaccinating at a rate of 1.5 million people per day. This will be a low point as we roll out vaccinations in the coming weeks to the common man in drug stores and then retail stores. It is now estimated that 40,000 drug stores and retail stores have applied for licenses to administer the vaccination in the coming weeks. As we provide the supply of vaccinations to the drug stores, I fully expect the number of vaccinations a day to increase substantially.
Caroline Schultz (7) celebrating her birthday weekend
From March 1st until June 30th, there are 122 days. If you assume that we can continue to vaccinate 1.5 million people at a minimum per day, that is another 183 million vaccinations to be added to the ones already completed. It is fully conceivable that by June 30th we will have vaccinated nearly everybody in the U.S. who actually wants to be vaccinated. Whenever that day comes, you will see such a rush of spending and increase in commerce, unlike anything we have seen in this country in many generations. It is going to be exciting!
Notwithstanding all the negative news you hear about the vaccine and its rollout, no matter how hard you squint, or what angle you look at it from, the coronavirus vaccinations are an overwhelming triumph. You want the actual proof of their success? With only 20% of the U.S. population currently vaccinated, the number of new cases in the U.S. over the past two weeks is down 35%. There are some states now that have only a few thousand active cases. For all the things that have gone wrong and for all of the criticism levied on the Federal government over the last few years, the vaccinations themselves have shattered even the most ambitious expectations. Not only has the American Spirit pitched in to solve a pandemic in record time, it also bodes well for the future where vaccinations can be created, tested and implemented over a short period of time. Unquestionably, this will lead to a healthier world population due to the experiences learned over the last 12 months.
It is already true that the economy is improving dramatically. The unemployment report for the month of January indicated an unemployment rate of 6.3%. There is no question that there are still 10 million people unemployed, but the government has funded these unemployed with lucrative benefits of unemployment and continues to extend those unemployment benefits well into 2021. As the vaccinations roll out in the spring, you will see restaurants reopen and retail stores get back to full employment. It would appear to me that employment should move up dramatically in only a few short months from where we sit today.
Caroline enjoying her sweet birthday treat
Every day I read about the pandemic and all the various mutations of the virus that could bring down the world economy. I am not exactly sure where these people get their facts since the scientific evidence, overall, is quite overwhelmingly positive. It is now estimated by some that the GDP in the United States will exceed 7.5% for the year 2021. That rate of growth has not been accomplished for decades in the U.S. What we now know from prior investing experience is that the one sure-fire reason that the market will go down is due to a recession forthcoming. Nothing that I have indicated so far would call for anything close to a recession in the year 2021.
I read with great interest that so many of the experts were forecasting the demise of Big Tech in America. Surely since the stocks had run up during the year 2020, we would see a gigantic pull-back in the performance of these large companies. After reviewing the fourth quarter earnings of the largest tech companies, it was almost breathtaking. Just look at the quarterly net income of Big Tech. During the fourth quarter, Apple earned a net profit of $29 billion. That was not gross, that was net. Add to that Google and Microsoft both had net profits of $15 billion for the quarter. Lowly Facebook, that sells no products only advertising, had an $11 billion net profit. And Amazon clocked in with a profit of $8 billion. By any definition, those performances were beyond extraordinary.
Take into comparison the former most profitable company in the world, ExxonMobil, which had a loss in the fourth quarter of 2020 of -$20 billion. At one time, it was thought that Congress was going to create a windfall profit tax because Exxon was making too many profits. It is now known that Apple makes more profits now than Exxon ever dreamed about in its heyday.
If you want good news about your home, then you do not have to look very far to get it. During December, existing home sales are up 22%, but more importantly, the average home price had increased a cool year-over-year at 12.9%. If you think about it for a second, an increase of almost 13% of the value of every home in the United States is a staggering amount of money. New home sales were also strong, going up 19% with the median price increasing by 8%. Keep in mind, the consumer’s net worth is directly linked to the value of his real estate.
As the value of someone’s home goes up, the value of their net worth increases, and their disposable income is freed up for consumer goods. This increase in housing prices bodes well for future spending by consumers. Now it can be said that home prices are directly attributable to the low interest rates we enjoy today, and I am sure that is true. However, never before have we seen interest rates stay this low for such a long period of time. You can attribute that directly to the Federal Reserve’s stated intent of keeping interest rates low for the next two years.
As we change administrations, you have the unwelcome influence of government, which is a negative in many aspects of our economy. Newly elected President Biden during his first week in office made moves to restrict the exportation and drilling of oil in the United States. By immediately canceling the Keystone Pipeline and revoking leases on the drilling of oil on Federal land, we all know (including him) this will lead to higher oil prices in the future. In fact, in a period of less than three weeks, the price of oil has gone up $10/barrel due to these actions. Part of the increase, I am sure, relates to the anticipated stronger economy coming this summer, but when you restrict exportation and drilling coupled with a stronger economy of people wanting to travel after the pandemic, certainly you will see higher oil prices.
There is not a more critical component of future inflation than the price of oil. The price of oil figures into virtually every aspect of every item we purchase. Due to transportation and the cost of manufacturing, this increase in the price of oil will be passed along to consumer goods, which almost assuredly will increase inflation.
Ava and Josh at the Statue of Liberty
So, what we are already seeing is that an increase in interest rates is taking place. The 10-year treasury now is up to 1.017%, considerably higher than it was less than 90 days ago. The 30-year treasury is still trading below 2%, but it is nearing that level for the first time in over one year. As explained here many times before, this increase in inflation will diminish the return on bonds, since they move inversely to the increase in these rates and very likely will provide a negative rate of total return for bonds for the year 2021. As I have predicted before, there is a high likelihood that cash will outperform bonds during this year of 2021.
We all understand the concept of political payback and we understand why President Biden moved quickly to support the environmental cause of many of his supporters. However, if he had moved more slowly and announced these changes to come up in the future, we probably would not have had this shock of inflation so quickly. The real danger, of course, is that if inflation starts to gain momentum, we could see the Federal Reserve change its theory of prolonged low interest rates and begin to increase them again.
If, by chance, the Federal Reserve started increasing interest rates, prior to their stated timetable of constant rates through 2023, that would certainly have a negative effect on the U.S. economy. Oil producing third world countries around the world must be applauding President Biden’s actions. The super-producers in the Middle East and Russia will receive instant gratifications of higher rates with these actions in the U.S. with President Biden doing more to support the economy in Russia in one week than President Trump did in four years.
What we know about the pandemic now, is that it was a terrible tragedy for the United States - for both the people who got sick and died as well as for the U.S. economy. What is fascinating to me, is the amount of conflicting information we received at the beginning of and during the process of the pandemic. You will recall, there were projections that we may lose as much as 5% of the population who would die from this pandemic. That would have been a death rate close to 15 million total. In the United States, we have tragically lost 473,000 deaths due to the pandemic, although many of those deaths were inevitable due to old age and ill health. But certainly, nowhere close to 5% of the population.
Partners Danielle Van Lear, Robby Schultz,
Joe Rollins and Eddie Wilcox
We were told that if you lock down your economy, you will prevent the spread of the virus and on the other end of the lockdowns, you will isolate and come out quicker. Just take the case of New York, where they proved the opposite to be true. Even though New York went through an extended period of lockdown, they have one of the worst records in all the United States. They are still mostly on lockdown today. In the process of shutting down their economy, they have destroyed their hospitality industry and have crippled their tourism business, maybe forever. And to what end did they accomplish this draconic shutdown?
New York has the largest number of deaths of any state in the union with almost 45,000. The state of Georgia, which has roughly 50% of the population of New York State, has lost a tragic 15,000 lives, but has a much better record than the state of New York. Florida which has a larger population than the state of New York, which did not put its economy through long periods of lockdown, had only 28,000 deaths as compared to New York’s 45,000 deaths. So, with the expressed desire to shut businesses down, they have accomplished virtually nothing positive in fighting the pandemic. Today Disneyland in California is still closed while Disney World in Florida has been open for months.
The poster boy for doing what is right during the pandemic was Governor Andrew Cuomo, who argued that he needed 40,000 ventilators, which he never used to fight the pandemic. Yet, his state has the worst record of any state when it comes to controlling the pandemic.
None of us know really what the long-term effect of children missing an entire year of school will be. My 9-year-old will go to her first class on February 8th. I guess you can say that this year was a total waste of her education, since clearly sitting in front of a computer for seven hours a day was not the equivalent of in-person educational instruction. That is a year of education that can never be recovered.
There are many lessons we have learned over the last year that hopefully will be beneficial in the future. What we now know is that large, enforced shutdowns were not the answer and clearly should not be in the future. But we have learned lessons regarding medicine that will benefit all of us going forward. In a record amount of time, we have created vaccines that not only work but are relatively inexpensive and are highly efficient. It is now believed that these vaccines can be adapted and used for many things which can be highly beneficial to future potential pandemics.
Partner Robby Schultz with 35-year client Mary Trupo
I just do not know how you can get more excited about the economy going forward. The economy is already building steam and it is highly likely that by late spring anyone who wants to go back to work would be allowed to do so. The projections of GDP growth in 2021 at 7.5%, which is almost too high to believe. Notwithstanding the very positive prospects of future economic growth, Congress and its ultimate wisdom will likely approve a $1.9 trillion stimulus sometime in the coming weeks.
If you recall the last stimulus about one year ago, was roughly $3.2 trillion, the one right at Christmas was close to $1 trillion and you have another $1.9 trillion this year. There is no question that putting this amount of money into the economy will be an economic boom of commerce and of individual consumer spending. As this money starts to flow through the system in the spring, along with the reopening of the economy and the hospitality and travel industry, you should see an economic explosion unparallel in multiple decades.
Ava and Dakota with 35-year clients
Gerry and Allen Davidson
While stock prices are clearly high, you must compare them with the extortionary low interest rates. Given that my projection is that bonds will have a negative return in 2021 and cash will earn virtually zero, stocks have become the only game in town. If compared to long-term interest rates, today stocks are actually not overpriced, but rather fairly priced.
In retrospect, when you think about it, the Federal government has or will put roughly $7 trillion worth of stimulus in the economy over the year; it is a mind-blowing reality. People ask me all the time how it is that they can create $7 trillion of new money. When you own the printing presses you can virtually create any amount of money you want.
Sheryl Matton, Gary McDade, Kathryn and
Mark Keramidas celebrating Mark’s
birthday in Deer Valley, Utah
There is absolutely no question that this is a long-term negative for the United States economy, but there is also no question that it is a short-term positive. No one knows what the future holds, but at some point, that $7 trillion will have to be repaid by future generations. You would expect that this flooding of the economy creating demand for commodities such as oil, food and housing will certainly increase the rate of inflation. Moderate inflation is actually good for the economy in many regards. It is not good if it is out of control. The combination of higher inflation and the potential of higher rates to reduce inflation will almost surely be a negative for the economy in 2023 and 2024. However, that is two years away and we need to enjoy the ride until the ugly inflation gauge stars to go higher.
On that note, come visit with us and discuss your goals and financial plans. If you are interested in discussing your specific financial situation, please feel free to call or email.
As always, the foregoing includes my opinions, assumptions and forecasts. It is perfectly possible that I am wrong.
Best Regards,
Joe Rollins
