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Happy New Year from 994 Group! Or, should we say, “bless our hearts?” Given the epic debacle of the last year, all 2020 resolutions will be automatically rolled over into 2021—economic themes included! International trade, government debt, elections, and obsessive predictions for the next major stock market decline dominated news headlines last January. And then, of course, the joker in the deck was a pandemic which would trip global health and economic dominos still falling today. It’s hard to believe how much has changed, AND how much has stayed the same…
Many of the aforementioned economic themes endure and are being amplified: Government debt is soaring. Protectionism expanded beyond trade in an effort to halt the spread of Covid-19. The “big downturn” hit markets in a historical fashion (more on this later). And, even the 2020 elections are leaking into 2021. As repeated ad infinitum, we always expect the unexpected. It is impossible to predict the cause and exact timing of economic shocks and related downturns in markets, yet we always prepare for an inevitable crisis. As 2021 commences, we are monitoring potential tax changes and the broad dynamics related to Covid-19. With vaccine distribution ramping up, interest rates near zero, and remarkable creativity by business owners, we are optimistic that 2021 will climb the wall of worry, and end better than it starts.
2020 aggregate market performance doesn’t tell the full story of the year’s market volatility. The S&P 500® declined 30.75% through March 23, 2020, yet still realized positive annual results. Diversification and discipline were challenged and rewarded across the board.
The U.S. Federal Debt was a concern before the 2020 budget soared to ~$3.1 trillion, yet prioritizing its payoff must be balanced with opportunity costs. While the debt is concerning, understand that a government budget doesn’t operate like a household budget. Microeconomics (households/businesses) and Macroeconomics (governments/economies) function differently. Prior dramatic measures by the government to balance the budget proved to actually harm the nation’s economy. Short-term spending cuts which sacrifice long-term growth hinder the economy and therefore ability to pay for necessary health and well-being benefits for its citizens. The inflation of federal debt is a subject where context is helpful. Consider the following: U.S. debt interest payments in 2020 were 1.6% of GDP. In the 1980s and 1990s, the rate hovered around 3% during a period in which total debt was much lower. While our country needs to begin addressing the massive debt, we are far from bankrupt, and it won’t serve us well to pay down debt to the detriment of the economy.
Recessions and crises are not created equal, and we are poised for continued improvement. Covid-19 created a healthcare crisis. We had neither the knowledge, nor the supplies, to treat or cure the novel disease. The recession followed as we fought the medical crisis by broad shutdowns. This created a supply-side, event-driven recession. 2008 was different – it was caused by major financial system structural issues that imploded. Ultimately, if you had to pick your crisis-poison purely from an economic standpoint, you don’t want a 2008 systematic financial structure failure. An event-driven situation that affects supply, like 2020, is less worse because it offers faster recovery. In the crisis created by Covid-19, the vaccine distribution currently underway provides a clear path to recovery. We still have a long way to go, but pent-up demand, near zero interest rates, and adapting businesses represent positive momentum.
Reminder: the S&P 500® experiences a 10% decline within every year, on average. Market volatility is consistent, even during periods of upward trajectory. Do NOT react. The opportunity cost for your financial plan is too high. Again, even during 2020, the S&P 500® increased 16.26% for the year after experiencing a decline of 30.75% from January 1st through March 23rd. The best days of market performance often follow the worst days – it’s imperative to participate in all the good days over time.
Hurry up and wait on tax changes. As we posted in late 2020, higher tax rates don't necessarily indicate a double whammy of stock market doom. So, while we are watching to understand the impact of tax changes, it appears that Biden’s proposal is more moderate than expected. Take a look here for a side by side of the big three: income, capital gains, and estate tax. Ultimately, we are always considering taxes in your plan regardless of the current tax tables – no client has ever said “I’d like to see about increasing the taxes I pay.”
2020 tested our resolve, as crises do, but our approach and view of markets endure. Stay disciplined. Stick to your plan. Focus on the things you can control. Adjustments to your financial plan and investment portfolio should only be based upon your personal headlines, not the news and social media headlines! So, as always, please reach out if your family’s headlines have changed!
We wish you and your family a healthy and joyful New Year! And, good luck with your 2020 resolution reboot!
Sources: First Trust 12-28-2020 Monday Morning Outlook, finance.yahoo.com S&P 500 Index 2020, MSCI.com, morningstar.com, Zack’s Investment Management
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