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Government Stimulus

From Tech-Loving Lockdown to a Stimulus-Charged Reopening?

By | 2021, Money Moxie, Newsletter | No Comments

The stock market does a good job discovering prices, but it gets carried away to extremes by narratives that capture everyone’s attention. When these stories change, the market changes.

In the early days of computing, memory was expensive, and programming in binary code was tedious. To save both money and time, programmers abbreviated years to two digits. For example, the year “1999” would have been recorded as just “99.”

This limitation was widely known going back at least to 1985, but by 1997, it was crunch time. Without a fix, there may or may not have been a valid date in computers for the first day of January 2000. And who would want to be in an elevator or flying in a plane when the clock struck midnight?

This “Year 2000 Problem” became known as Y2K. Companies all over the world were upgrading computer hardware and software in anticipation of Y2K. This further increased the high demand for technology, and the stock market investors were well-aware. It added fuel to the tech-stock fire and caused many to adopt a belief that the best way to make money was in technology stocks.

Covid-19 precautions created a similar tech-heavy narrative to investing in the year 2020. While many of the largest companies profited a great deal from the Covid-lockdown of 2020, investors began to favor any technology companies, even those without profits, by the end of the year.

I decided to go back over the last 20 years to test the idea that the best way to make money is in technology stocks. After all, who could argue that technology companies have not been the most successful since the year 2000? What I found surprised me. From February 2000 to February 2021, the tech-heavy NASDAQ index returned an average of 5.05% per year. How about the more diversified S&P 500? Over the same time, it averaged 5.02%—roughly the same with a lot less volatility.

How could the S&P 500 outperform when “FAANG” (Facebook, Apple, Amazon, Netflix, Google) companies have been so prominent? While these did fine in the early 2000s, the best performing areas were sectors outside of technology.

It is impossible to say exactly what the future will bring, but a change in leadership at some point is inevitable. As we enter the spring of 2021, we may have already seen a change begin. With vaccine distribution, investors have transitioned from a tech-loving lockdown to a stimulus-charged reopening. Only time will tell if this is truly the beginning of new market leadership or if that change won’t come until later.

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2021 – Year of the Vaccine

By | 2021, Money Moxie, Newsletter | No Comments

Irrational Exuberance
On January 7, 2021, Elon Musk tweeted a recommendation that people replace the social media app Slack with Signal. Instantly, the stock for Signal Advance, Inc. began to climb. It finished the day up over 500%. Unfortunately, Signal Advance does not have a social media app.

Investors should have started selling the moment the mistake was publicized. Instead, the stock kept rising. In less than a week, Signal Advance rose 11,700%!

Let’s look deeper into what a number like this really means. An investor who owned $10,000 of this stock would have had nearly $1.2 million three days later. Of course, groups often move in irrational ways, but at some point, the truth begins to matter. On the fourth day, it had an epic fall, giving up most of the gains.

Behavior like this has happened before. In fact, it was common back in 1999. On April 1, 1999, The Wall Street Journal reported the story of AppNet Systems, which filed to have its stock publicly traded. That day, investors began buying up Appian Technology. Despite being described as an “inactive company,” the stock rose 142,757% in two days. Needless to say, it didn’t end well for most of these investors.

In 1999, online trading was new, and so were the internet chat rooms where investors could share stock tips. It seemed that nothing could stop the momentum.

Warning Signs from 2000
Technology stocks began to fall in February 2000, and the rest of the market began to fall in March. What triggered the decline? Were there any signs?

(1) Was it Yahoo’s addition to the S&P 500 on December 7, 1999, which signified the acceptance of technology domination in the investment world?

(2) Perhaps it was the symbolic show of a new world order when internet upcomer AOL purchased media giant Time Warner on January 10, 2000?

(3) Finally, could it have been that the S&P 500 price divided by future earnings was at an all-time high of 26 in February 2000?

(If you don’t remember or have never heard of AOL, well, that proves the point I am trying to make. Good investing is very different from speculation.)

Investor Mindset
Greater and greater stimulus from the federal government and the Federal Reserve have created an environment where some investors are only focused on return. They ask themselves, “How much money do I want to make?” Then, they invest accordingly.

Of course, there is no limit to how much money most people want, which is exactly why this won’t last forever. The stock market is not an ATM.

This bull market will end. However, it is difficult to accurately predict the timing of a falling market when in the middle of a powerful bull market. It could be in February or, with all the government support, it may keep going throughout 2021.

Government stimulus and all the new money that comes with it will have to go somewhere. This could be a great support for investors as 30% of the stimulus is not needed by its recipients and gets saved. Roughly the same amount is spent, and another part pays off debt. All of these help the stock market either directly or indirectly.

If even more stimulus comes in 2021, then we can expect more spending and more investing.

What could go wrong in 2021?
Unintended consequences are an incredible risk for the unprecedented government stimulus we have experienced. However, we have not seen any major negatives yet. Until we do, it is quite possible that the stimulus will continue to flow in 2021.

I will be keeping an eye on inflation. In the Great Depression, America had the New Deal. People were paid to work. In the pandemic of 2020, people were just paid.

As the money is spent, demand could outstrip supply, and prices could rise. If inflation somehow reaches 3% in 2021, then I believe the Federal Reserve will take the punch bowl away from the party. For now, Fed Chairman Powell says he is “not even thinking about thinking about” doing that. So, no reason to panic.

What could go right in 2021?
I expect a great rotation to begin at some point in 2021. This change could end what I would call the profitability of speculation. However, it does not necessarily mean a crash in the market. I’ll explain.

When the economy was barely growing over the last 10 years, it didn’t make sense to run from growth. This made it possible for technology, which was a poor investment from the year 2000 through 2008, to become a leader. Technology was the undisputed leader of 2020 as it was also well positioned for the stay-at-home economy during the pandemic.

Technology represents over 25% of the U.S. stock market, but this is not a fixed level. Just before falling out of favor in 2000, it was 30%. By 2008, it was only 15%.

Keep in mind that in 2020, technology only represented 6% of the U.S. economy and just 2% of employment. That means there is a massive amount of opportunity out there just waiting to regain strength. I believe that at some point in 2021, we will get that change of focus and market leadership.

International stocks, small company stocks, industrial stocks, and energy stocks have already begun to strengthen after years of lagging behind.

Only time will tell, but if the new trend continues as it has over the last few months, then we may be seeing new market leadership that will point the way forward for years to come.

*Research by SFS. Data from the Federal Reserve Bank of St. Louis. Investing involves risk, including the potential loss of principal. The S&P 500 index is widely considered to represent the overall U.S. stock market. One cannot invest directly in an index. Diversification does not guarantee positive results. Past performance does not guarantee future results. The opinions and forecasts expressed are those of the author and may not actually come to pass. This information is subject to change at any time, based upon changing conditions. This is not a recommendation to purchase any type of investment.

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What does a Biden presidency mean for the economy and investing?

By | 2021, Executive Message, Money Moxie, Newsletter | No Comments

The recent election has some people elated and others in the depths of despair. While we don’t focus on the political ramifications, we can consider some of the financial impacts that may come. There is no guarantee that any of these will happen, but here are some possibilities:

We get more stimulus: In the short-run, this is a great thing for our economy and the market. There are too many Americans and businesses that are still struggling and need help to get through this pandemic. The long-term challenge is how to pay down the government debt.

Taxes go up: Even before the election, we knew that taxes needed to go up because of the massive amount of government debt. We have been at historically low tax rates. While tax rates seem unlikely to go up soon, don’t plan on them staying this low forever. Depending on your situation, you may want to realize taxation of some assets now to avoid paying taxes in the future. Consult with your financial and/or tax advisor.

Interest rates go up: They will probably still stay low for a while (i.e. 1-2 years). However, they will probably start going up after that. Increasing rates are good for savers and bad for borrowers. CD’s may pay a decent rate in the future, but affording a home will get harder.

Investing in ESG goes up: ESG stands for Environmental, Social, and Governance, also known as sustainable investing. With the Democrats in power, companies that are ESG friendly should get a boost. Examples of companies that will benefit include green energy, health and safety, and companies that promote diversity.

The economy will grow: The economy will probably start to recover quickly at first as we accelerate out of the global pandemic. However, growth will probably be slowed down by taxes and inflation after that, but it will still go in the right direction.

The market may go up: In the long-run, this is certainly likely. Over the coming months, the market could go up because of the recent stimulus and the prospect of more stimulus. A great deal of this money is likely to go directly into investments, while some will boost the economy through spending.

There may be some softness after that. But, as the economy fully recovers from the global pandemic, the market should continue its march higher. The market has shown that it doesn’t matter which political party is in power. It still does what it is going to do.

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Why Investors Feel So Bullish

By | 2020, Money Moxie, Newsletter | No Comments

The stock market exploded higher in November along with cases of COVID-19, just as it did in April. Despite all the challenges of 2020, it seems the market is so bullish that it can only go one way. The reality is that anything could happen. The future is not predetermined, and the market does not think for itself. It is merely a compilation of investors’ views – a popularity contest, or as Warren Buffet calls it, “a voting machine.” For most of 2020, investors have viewed all good and bad news as positive. “Heads I win. Tails I win.” It is all a matter of perspectives–perspectives that I would like to explore.

Government Help
Stimulus in Spring and Summer was 6 times greater and was spent 6 times faster than that for the Great Recession of 2008/2009 (David Kelley, JP Morgan). The impact was incredible! It immediately forced stocks upward. Then it lifted spending, especially on items like homes, cars, furniture, and laptops.

Many Americans are in great need of more help and may get it. This additional stimulus may not come until February and will likely be much smaller than in May. However, with the economy already doing okay, the stimulus would be viewed as positive from the perspective of investors.

Low Rates
The Federal Reserve said it would build a financial bridge to the end of the pandemic, and it has stuck to that statement. It has lowered interest rates and promised to keep them low unless inflation averages move well beyond 2%. This has pushed investors away from low-yielding bonds and into riskier assets, pushing stock prices even higher.

These low rates have also increased the affordability of homes, which has, in turn, pushed those prices up.

One major risk is stocks could get too hot – a problem that contrasts with the uncertainty of 2020.

Improvement
The COVID-19 pandemic won’t last forever. With positive vaccine news, we can now see the light at the end of the tunnel.

With investors and consumers already feeling optimistic, there is the potential for more economic growth.

Investors have anticipated this improvement and continue to push up prices. While we are enjoying the higher market, we recognize that the more hot stocks get, the greater the chance of them being overcooked. We continue to emphasize the need for a good strategy and personalized plan.

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