Investing In A Biden Era Economy-Part Two
As Seen In The Tribune
February 12, 2021
A few weeks ago, we published an article containing a high-level overview of investment opportunities under the new Administration. As a continuation of that theme, I wanted to offer some greater depth on those thoughts.
As of the end of January, in my opinion I believe we are already beginning to see some classic characteristics of market rotation. The ten-year treasury yield is noticeably higher over just the last four weeks, the energy sector has risen noticeably as well as evidenced by crude oil. We are also noticing that market segments that lagged the rally in the previous year, seem to be among the leading market segments in the early stages of 2021.
Impact of Printing Money
Janet Yellen, former Federal Reserve chair person, and newly confirmed treasury secretary, has already stated her opinion that additional stimulus is required. By extension, we can assume that the Federal Reserve probably won’t depart from its accommodation posture anytime soon. To me, this means more printed money, where each newly printed dollar weakens the existing dollars, thus eroding your purchasing power.
Furthermore, we have heard about the potential for corporate tax liability to rise, as well as a new FICA tax on income above $400,000, taxation on repatriated dollars, and other things that will factor into higher cost of production. Generally, those costs are not borne by the companies themselves, but instead are passed along to consumers in the form of higher prices.
Back to Basics…in Goods & Services
So, between additional stimulus, which will result in a weakening dollar, and higher taxes which will add to cost of production, we can expect inflation on at least two fronts which will impact the behavior of consumers.
Rather than being focused on discretionary spending, and the consumption of economically elastic items, historically consumers have shifted their focus away from the consumption of luxury non necessary items, to primarily the consumption of staples. These are economically inelastic goods and services. Said another way, you will generally consume economically inelastic staples regardless of where we may find ourselves in economic cycle.
This would include such items as toilet paper, paper towels, dishwashing detergent, cereal, macaroni and cheese, soft drinks, bars of soap, utilities and telecommunications. You will take an aspirin if you have a headache, heat your home, talk on your phone, wash your clothes, take a shower, consume paper products and other staples items, but not necessarily consume a $7.00 cup of specialty coffee.
Corporations & Manufacturing
Likewise, as regulatory impediments influence capital expenditures at the corporate level, along with additional burdens of taxation, we can expect the behavior of corporations to shift as well. At a high-level, companies will become increasingly less likely to focus on the expansion of plant and capacity, and the ability to produce greater amounts of products, but will rather be incentivized to spend money in ways that increase the utility and the efficiency of the capacity that they have. Therefore, process automation, robotics, information management will likely be areas that prosper while discretionary and non-necessary areas of expenditure will not.
As we observed under the Obama administration, we can assume that the velocity of money will again decline. This is a characteristic of both corporations and individuals being cognizant of potentially higher liabilities of taxation, and that the remaining amount of weakening, net spendable dollars, will likely be purchasing fewer goods and services as inflation becomes of greater concern.
Changes in Your Portfolio
Therefore, at a high-level, I believe at this time it would be a good idea for investors to be very aware of the sector exposure concentration of assets within their investment portfolios, as a function of the objective behind those portfolios. This might be a good time to shift away from large growth and high beta assets, to the traditionally dividend centric, value types of holdings with a concentration in economically inelastic staples, rather than in economically elastic discretionary goods and services.
As we mentioned in our previous article, seasons change. The shorts and the T-shirts that you were wearing in July, just aren’t the best option for the weather in January. Today, it is time for the jeans and the jackets. Patterns of behavior change as well. The swimming pool is a fantastic place to beat the summer heat. Sure, you could choose to go swimming in January, but I don’t think the 45° water would be very comfortable.
We also have the benefit of looking back to Obama administration for insight as to investment opportunities when faced with characteristics of declining velocity of money, higher inflation, higher taxation, stagnating wages, and tepid economic growth. We can assume, that we will soon find ourselves in a similar economic disposition. At a high-level, I would encourage everyone to be aware of their exposure to economic segments as the seasons are changing, and evaluate the merits of reallocating accordingly. Clearly this is a function of the risk tolerance of an individual, liabilities of taxation on realized gains, and other factors.
If you work with a financial professional, engage that person frequently at this time for an in-depth evaluation of your unique situation. If you are without such professional guidance, please do not hesitate to give us a call.