Originally Published January 8, 2021.
We are excited to be turning the page on 2020. Although COVID-19 continues to paralyze much of the globe, two American companies—Pfizer and Moderna—have developed highly-effective vaccines in record time. This astonishing scientific achievement demonstrates that American exceptionalism is alive and well. It is this type of talent, ingenuity and innovation that characterizes our beloved America and emboldens us—as investors—to look through the dark clouds of uncertainty and believe in the bright potentiality brought to form by the continued advancement of technology coupled with an unbridled entrepreneurial spirit.
Notwithstanding the well-known challenges of 2020, it was an exceptional year for Kercheville Advisors and our clients with growth-oriented portfolios. For decades, we have sought-out and invested-in businesses poised to benefit from emerging technologies, changing consumer habits, and paradigm shifts within industries. In 2020, these investments in companies building and benefiting from the “digital economy” were greatly rewarded as the pandemic accelerated the demand for their products and services. Trends that would have taken years to play out suddenly materialized overnight as companies and organizations around the globe were forced to rapidly adapt to this new, pandemic-plagued operating environment. We expect that many of the tools, policies, and practices adopted during 2020 will persist going forward. We remain diligent in our pursuit of new investment opportunities in businesses facilitating the development and utility of the “digital economy.”
A third exceptional aspect of 2020 has been the overwhelming fiscal (Government) and monetary (Federal Reserve) response to the COVID-19 pandemic. Since last March, cumulative domestic stimulus measures exceed 33% of US GDP.[1] Federal government spending is up 47% from 2019.[2] M2 money supply increased 25.2% year over year.[3] These extraordinary fiscal and monetary initiatives have been like an adrenaline rush for financial markets—contributing to the glaring disparity between Wall Street and “Main Street.” At some point in 2021, we anticipate a sharp rebound in economic activity due to pent-up demand and because the combination of economic lock-downs, travel restrictions, and stimulus checks have allowed many consumers to save money.
As we begin the new year, we see signs of market exuberance and speculative excesses, fueled by an accommodative Federal Reserve and the expectation of further debt-fueled spending initiatives from the new Democrat-controlled government. Investors should prepare for bouts of volatility and periodic “corrections” of 10-15%. We want to position our clients to withstand these drawdowns and capitalize on opportunities to buy high-quality equities when they are on sale. At this point, financial markets are pricing in lofty expectations, and we think it is wise to maintain a larger cash balance than normal—especially for clients in or near retirement.
In this highly-uncertain environment, it pays to consider what could derail the market’s momentum. Catalysts that could threaten the recovery include: (1) delayed herd immunity due to vaccine distribution issues, and/or reluctance within the population to get vaccinated; (2) a meaningful change to Federal Reserve monetary policy sparked by rising inflationary pressures; (3) a wave of defaults and bankruptcies as moratoriums expire; (4) stretched valuations leading to a repricing of risk; (5) structurally slower GDP growth due to burdensome regulations and higher taxes from Washington DC; and (6) a “black swan” event such as substantial viral mutation, war in the Middle East, boiling geopolitical tensions, terrorist attacks, etc.
It is worth remembering that America is great despite our elected officials—not because of them. The entrepreneurial spirit animating America is our enduring legacy and defining characteristic. No matter which political party occupies the White House or controls Congress, it has been a colossal mistake to bet against America. With the Biden Administration set to take office on January 20, we anticipate an environment reminiscent of the Obama era—sluggish GDP growth, more regulation, and higher taxes. This scenario likely favors companies whose revenue trajectory is not dependent on robust economic growth. We believe that a combination of prudent stock-picking while maintaining sufficient liquidity will be a winning approach.
We finished 2020 with strong momentum, and you can help build upon that momentum by making contributions to your account(s). As we begin a new year, it is a perfect time to review your financial plan and investment objectives. If your financial situation has changed, please let us know. If you would like to discuss your personal portfolio and investment strategy, contact us at (210) 694-5000.
We are grateful for your trust and confidence, especially through these disconcerting times. Our clients always come first, and we will continue to work diligently for you in 2021 and beyond. If you have family, friends, business associates, or neighbors who could benefit from a service like ours, we would love to learn about them.
Sincerely,
Josh Kercheville, CFP
[1] 2019 US GDP ($21.427 trillion). “Cumulative stimulus” includes $3.9 trillion Government stimulus measures and $3.2 trillion in Federal Reserve balance sheet expansion.
[2] https://www.washingtonexaminer.com/news/federal-deficit-spiked-to-3-1-trillion-in-2019-largest-since-wwii
[3] https://fred.stlouisfed.org/series/M2