Twelve months ago we proclaimed, “What a year and what a decade!” Boy, were we early with that declaration; turns out 2020 was the year to top all crazy years, and certainly not in a good way. Although we were optimistic for 2020, we never foresaw a global pandemic that would change the way we all interact personally and professionally. We also never foresaw the unbelievable amount of federal spending that has seemingly had such a beneficial effect on the stock market. But we believe that effect is overblown; no matter how it’s explained, we believe the U.S. stock market is in a bubble (and real estate as well possibly).
However, just because we may be in a bubble does not mean that the markets will come crashing down soon; on the contrary, our best guess is that the markets will continue to inflate in the short-term, it’s the mid to long-term we worry about. You see markets tend to move to extremes, and though a market may be overvalued and irrational, bubbles can still inflate for weeks, months or years. But our combined forty years of experience, plus extensive research, informs us that markets do eventually rationalize to counter current craziness. And when I say crazy, it’s because we believe there’s no serious, fundamental justification for a scenario where a car stock goes up over 700% in one year. We also believe it’s unrealistic to think that the last few years of annualized returns can continue undaunted by massive debt; remember the 16% increase in the S&P 500 last year follows a 31% increase from 2019, yet the average annual return since 1926 remains a bit over 10%. And sure, we know the elevated price/earnings multiple can be better explained when rates are so persistently low, but doesn’t that sound eerily like “it’s different this time” again? Or better yet, has anyone ever heard of reversion to mean?
Again, we are actually pretty optimistic for the short-term. The virus-induced recession had a different start (there was/is a supply rather than demand shortage) and it will probably have a different end where post-virus demand may be satisfied by increased spending and lower unemployment. But math is math; regardless of whatever financial experiment we may be in, whereby the government essentially prints money with abandon (see the October 2020 newsletter, “The Great American Financial Experiment”), we still cannot justify the long term balance sheet. I sincerely hope we are wrong, but there are just too many variables that need to be ignored for this experiment to be successful forever without consequence.
As for that massive debt I referenced, according to the nonpartisan Congressional Budget Office, the federal government debt held by the public is now close to 100% of Gross Domestic Product; in 2007 it was only 35%, but by 2030 it is estimated to be about 110% of GDP. The natural and historically-based fear is that the increase in money supply will stoke inflation, as well as choke off sources of income for other government requirements; for instance, do we pay for our national debt, or do we continue to give people their social security checks? And if you want to argue that Japan has successfully navigated this same debt path with little inflation, then at least concede that Japan has also not had much growth either (an arguably zombie economy for the same 20-30 years). Long story made short, there are always consequences; our hope is that if the short-term is prosperous then we (the people and the government) are prudent enough to use the reprieve to address the potential mid and long-term issues as well.
Switching gears, we have a few admin notes. First, please note that we purposefully tried to harvest tax losses in the beginning of the year (when the pandemic first struck) to hopefully offset future gains and possibly income; please review this with your tax professional. Towards that end, and second, please also remind your tax professional of any qualified charitable distributions you may have made during the year, as well as any distributions you may have replaced into your qualified account(s) such as an IRA (as part of the Cares Act cancellation of mandatory distribution and subsequent permission to replace such distributions). Last but not least is a note about our new office address.
As you may know, Wynne and I sold our house to be able to move into a downtown apartment as newly minted empty-nesters; and then Covid hit. As a great general once said, everyone has a plan until you get punched in the mouth! After a good deal of professional and personal consideration, we decided (similar to many business owners) that it just doesn’t make sense to pay for an office that we don’t need (since we work with clients in over 27 states, the Charlotte office wasn’t even utilized that much to begin with). Accordingly, we have transitioned to a home office set-up in Greenville, S.C. (just down the road from Charlotte); once we’re allowed to travel, we will simply come to you for our personal visits. In the meantime, other than a new mailing address (P.O. Box 8596, Greenville, S.C., 29604), nothing else will change; we will still call you every 30-45 days, we will have the same phone numbers, and we will still be available via phone or zoom anytime you need to speak with us.
As we said in the beginning of this newsletter, the virus has changed the world; how we conduct business, as well as how we interact with and treat each other. And how we treat each other starts with recognizing that you are the only one who can drive yourself crazy; by restricting outside influences from taking over common sense and rational thought, you are better able to accept differing opinions without getting too upset. And we strongly believe that the nation’s direction must be dictated by compromise from people with diversified thought. So please remember that while we may not agree with everyone, we are still all Americans, and what unites us is so much more than what divides us.
Have a great start to the new year, and as always, thank you for your friendship and trust!
Information in this material is for general information only and not intended as investment, tax or legal advice. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. Securities and advisory services offered through LPL Financial, a registered investment advisor, member FINRA/SIPC.
TWC Wealth Management and The Finance CoupleTM are separate entities from LPL Financial. Tracking Number 1-05099747