December 29, 2021
Throughout this strange and unique year, I’ve shared my opinions and observations with you regarding volatility, and opportunities. As we close the year and look forward to 2021, I wanted to cast a glance forward to what we might anticipate in the coming year.
On the 16th of December, I celebrated the end of my 29th year in the practice of financial planning. Across those years, I have worked through some challenging times. In many ways, 2020 was unique among them. This year has done much to test our emotional capacity, our mental toughness, our financial resiliency, and in the process, I also believe that it has redefined the resolve with which we approach financial planning and investment management.
I’ve often heard it said that the hardest steel is forged from the hottest fire. Well, the steel with which we’ll meet the coming year could probably be used to cut a diamond.
Nine months ago, I don’t believe anyone thought that we might see the Dow Jones Industrial Average break 30,000 before the end of the year. Clearly, we have come a very long way in a relatively short period of time. The economy has rebounded strongly, and we find ourselves with many reasons for optimism as we consider the coming year.
However, as I have addressed within my previous writings, elevated risks remain in the short term of which we must be mindful. Thirty days ago, I suggested that the result of the election was still an unknown factor. That remains the case today. Indeed, that will not truly become a known factor until after the Senate runoff race in Georgia on 5th of January.
The outcome of those races could have a dramatic impact on the political landscape in Washington. If we remain with a gridlocked Congress, then it is unlikely that massive changes to the Tax Code, fiscal and economic spending policies will likely pass. Without gridlock, then it is entirely possible that we may see egregious changes in not only the tax code, but also in many other areas that could directly and peripherally impact the economy.
As it stands at the end of 2020, I remain with the opinion that neither the stock nor the bond market has priced into itself the impact of a dramatic change in either the Tax Code, or economic and fiscal spending initiatives in Washington.
Historically, markets have not fared as well when one party had complete control as they have during years of gridlock. Because markets are discounting mechanisms, and because I believe that the assumption of no dramatic change has been priced into current market valuations, I believe the markets will be watching the results of the Georgia runoff races intently. I do believe that the absence of gridlock could bring with it the potential for a sharp and sudden repricing of risk.
It is something of which we should all be mindful, and to that end, I have encouraged all of our clients to approach the coming weeks in a defensive and hedged manner, while remaining true to the underlying investment objectives that we are trying to achieve.
Ironically, the fact that we are near all-time record high levels in the market, could exacerbate the complexity of this situation. As we have discussed on many occasions before, we live in a high frequency trading environment where algorithms can move in tandem.
Generally, the buffers around such algorithms become increasingly tighter at higher market levels. We have to be mindful of the potential for a sudden, and politically induced change in market assumptions regarding the economy, on the second trading day of the year, to potentially be a catalyst for another cascade of melting algorithms.
Conversely, I can think of numerous reasons for optimism as we approach the new year. On balance, economic data looks robust, and the momentum of economic growth does not appear to be slowing down.
As I’m writing this, we have two COVID-19 vaccines that are being administered to our front-line medical professionals, first responders, and those who may be elderly and with the highest comorbidities. According to Brian Wesbury at First Trust, there are many more vaccines that are in phase three trials at the moment, so throughout the coming year, we may have many other and different vaccines with which to combat this disease.
I believe that could be of significant psychological benefit as we gradually return to what normalcy means for each of us. I believe that could be of great help as we consume leisure, have dinner at a restaurant, go to see a movie, take a vacation and travel. I also believe that this will support the expansion of jobs creation, and underpin individual consumerism, throughout the coming year.
Should that turn out to be the case, then by extension, I believe we can assume that the velocity of money could remain higher as corporations are incentivized to spend, and expand their capacity to meet the demands of increasingly confident consumers.
This is certainly a strange period of time. I can give you a myriad of reasons, supported by empirical data, for optimism as we move into the new year. Conversely, there are some very real reasons to be concerned about the potential for heightened volatility. One thing I can say with certainty, is that this is not the time for anyone’s portfolio to be on auto pilot.
In closing, throughout the year we have strongly suggested that everyone should have a comprehensive financial plan that clearly identifies not only the objective being pursued, but also the risk metrics of how you’re trying to achieve the goal. When you have such a plan, navigating periods of time like this becomes easier.
I would suggest remaining true to the provisions of those plans, recognize the reasons for optimism, while being mindful of the risks that remain. Be hedged when appropriate, and have the intestinal fortitude to make periods of market dislocation serve your turn. Lastly, from all of us at Keystone Financial Group we wish all of you a very happy and healthy new year.