Friday, December 25, 2020

The Georgia Senate Run-Off May Matter Less Than Some Think

 YouTube Video Version

 

In the 2021 Outlook, I discussed the coming run-off election for the two Georgia Senate seats. In the outlook, I said equity markets tend to do better under a divided government than when one party controls both houses of Congress. Equity markets seem to be proceeding under the assumption that Republicans will retain control of the Senate, and we will continue with a divided government. I've had a couple of questions asking how the economy and markets would respond if Democrats took control of the Senate.

 

The nation continues to be divided across political and ideological lines. Everything seems to be seen through a partisan lens. However, the Senate is considered to be a more deliberative and moderate legislative body. Currently, Republicans hold 50 of the 100 Senate seats, Democrats 48, and the remaining two will be decided by a run-off election to be held on January 5th. Were Democrats to win both of the run-off elections, they would gain control of the Senate when Vice-President Elect Kamala Harris takes office. The Vice-President serves as the President of the Senate and may vote to break a tie. Some are assuming that if Democrats win control of the Senate, we could expect a radical change in tax policy and other government regulations. There are rumors that Democrats will move to expand the number of Justices on the Supreme Court and add left-leaning justices. There are rumors that Democrats will seek to end the filibuster, minimizing legislative debate.

 

Unlike the House of Representatives, Senators don't always vote along party lines. On November 9th, 2020, Sen. Joe Manchin (D-WV) posted his comments from a Fox News interview on his Twitter account; "Let me be clear: I will not vote to pack the courts & I will not vote to end the filibuster. The U.S. Senate is the most deliberative body in the world. It was made so that we work together in a bipartisan way. If you get rid of the filibuster, there's no reason to have a Senate."

Joe Manchin's - Twitter Post

 

Govtrack.us gives legislators an Ideology Score based on bills that they sponsor, co-sponsors, and voting records. The score can be used as a left-right scale. The 2019 Score Card ranked Sen. Kyrsten Sinema (D-AZ) as the most conservative Democrat in the Senate, more conservative than both Sen. Rand Paul [R-KY] and Majority Leader Sen. Mitch McConnell [R-KY].

Govtrack 2019 Senate Ideology Score

 

If Democrats take control of the Senate, markets may have a short period of volatility as market participants reposition some investments. But I do not believe it would necessarily signal a radical legislative agenda.

Sunday, December 13, 2020

The Roaring 20’s

The Roaring 20's
2021 Outlook 

In school, we were taught that the economic expansion known as the “Roaring 20’s” was ushered in by the end of World War I in 1918. Maybe that wasn’t the whole story. Maybe the pent-up demand of a nation that had been locked down during the Spanish Flu of 1918 & 1919 played a more significant role than we once thought.

 

So far this month I’ve reviewed more than a dozen economic and market outlooks for the coming year. The range of expected outcomes ranges from a double-dip recession to equity market returns of 20%. There are always things to worry about. It is said that markets climb a wall of worry. But I believe that 2021 could be a good year for the economy and markets provided a few issues resolve favorably.


The Summary

The economic data supports the outlook that the economy will expand and markets will rise in 2021. The consumer has significant savings, increased access to credit, and pent-up demand for traveling, spending, and engaging in the economy. The Federal Reserve has stated that monetary policy will remain accommodative and inflation remains under control. The Federal Government is expected to provide additional fiscal support. Although there are never economic or market guarantees, the current economic conditions support expansion.

The outlook is based on some assumptions.
  • The vaccine will be distributed with minimal disruption and will be effective.
  • The vaccine will be available to everyone who wants it in the 2nd.
  • Republicans retain control of the Senate.
  • Consumer spending increases in the 2nd half of next year.

 

The Positives

From a financial standpoint, the Pandemic has not impacted everyone equally. Our local small businesses are essential to the fabric of our communities, they have been hit harder than larger national chains, but their stock isn’t traded on equity markets, so their struggles have not been a drag on the rising stock market. Those who work in the service sector, retail, travel, leisure, and entertainment have also been hit hard. We can’t lose sight of the fact that the Pandemic has caused real financial hardships for people. However, many people have continued working either remotely or socially distanced. Those who have been able to work remotely tend to be more highly paid workers and are responsible for a larger portion of consumer spending.

 

Congress has provided several financial aid packages, and all indications are that there are more to come. To better understand why the economy and equity markets may continue to grow next year, we need to look at what Americans have done with their money during the Pandemic and current economic data.


  • We’ve seen a spike in the personal savings rate. According to the Federal Reserve Bank of St. Louis, the current personal savings rate is 13.6%, following a spike to 33.7% in April. This is the highest personal savings rate since 1975.
  • According to FICO, the average American’s credit score is 711, a 15 year high.
  • The rising stock market and rising home values are creating a wealth effect. A report from the Federal Reserve showed Americans’ household net worth hit a record $123.5T in the third quarter
  • As measured by the Consumer Price Index, reported by the Bureau of Labor Statistics, inflation is running at a low 1.7%, still below the Federal Reserve’s target of 2%. 

Equity markets are forward-looking. Market participants anticipate where the economy will be in six to twelve months rather than responding to current conditions. Higher levels of unemployment and local lockdowns will be a drag on the economy in the near-term, and unemployment may rise through the Winter. Still, these conditions are expected to be temporary, and markets tend to look through transient events.

 

The Challenges

Much of the political uncertainty that has been hanging over markets for the past year has been resolved. The run-off races in January will bring this political season to a close. Markets appear to have priced in that Republicans will retain control of the Senate. Markets perform best under a divided government where significant changes are less likely and take longer to occur.  If Republicans do not maintain control of the Senate, I expect a period of increased market volatility as market participants reposition their investments. Democrat control of Congress may mean higher taxes but could also mean larger stimulus packages.

 

The Pandemic brought our economy to a halt. The success of the vaccine’s distribution, efficacy, and adoption is critical if we are to see a return to normal economic activity.

 

 It isn’t clear how many of the jobs lost during the Pandemic are permanent and how many will come back as the number of cases falls and more people reengage with the economy. A rise in unemployment is expected through the Winter months improving as we move into the Spring.

 

In recent years there has been increasing friction regarding international trade. We aren’t sure what future trade policy might look like or its impact on the economy.

 

Additional government support is needed to bridge the economy until the Pandemic has passed. If Congress fails to deliver the necessary support, risks to the economy grow.

 

Equity markets are expensive on a Price to Earnings basis. According to the Wall Street Journal, the S&P 500 is currently trading at 41.52 times trailing earnings and 25.85 times forward earnings. These levels are at historically higher levels due to the low yields in fixed-income investments. If earnings disappoint next year, estimates for market returns may need to come down.

 

There are always positives and negatives to consider when investing. Conditions can change, and ongoing monitoring is needed to evaluate needed changes. Please call me with any questions or concerns.



Disclosures

The opinions, statements, and forecasts presented herein are general information only and are not intended to provide specific investment advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, please consult your financial professional before investing. 

Any forward-looking statements, including the economic forecasts, may not develop as predicted and are subject to change based on future market and other conditions. All performance referenced is historical and is no guarantee of future results. 

All information is believed to be from reliable sources; however, Rhino Wealth Management, Inc. makes no representation as to its completeness or accuracy. 

Investing involves risks, including possible loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk in all market environments. Diversification does not protect against market risk. Investing in foreign and emerging markets, debt or securities involves unique additional risks. These risks include, but are not limited to, currency risk, geopolitical risk, and risk associated with varying accounting standards. Investing in emerging markets may accentuate these risks.

Gross domestic product (GDP) is the monetary value of all the finished goods and services produced within a country’s borders in a specific period. However, GDP is usually calculated on an annual basis. It includes private and public consumption, government outlays investments and exports less imports within a defined territory. 

The PE ratio (price-to-earnings ratio) is a measure of the price paid for a share relative to the firm’s annual net income or profit per share. It is a financial ratio used for valuation: a higher PE ratio means that investors pay more for each unit of net income, so the stock is more expensive than one with a lower PE ratio. 

Earnings per share (EPS) is the portion of a company’s profit allocated to each outstanding share of common stock. EPS serves as an indicator of a company’s profitability. Earnings per share is generally considered to be the most critical variable in determining a share’s price. It is also a major component used to calculate the price-to-earnings valuation ratio. 

The Standard & Poor’s 500 Index is a capitalization-weighted index of 500 stocks designed to measure the performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. 

Investing in stock includes numerous specific risks, including the fluctuation of dividend, loss of principal, and potential illiquidity of the investment in a falling market. Because of their narrow focus, sector investing will be subject to greater volatility than investing more broadly across many sectors and companies.