📝 Market Commentary for 2020-Q4 and 2020-YE
This year, we have experienced historical monetary and fiscal intervention in the U.S., major shifts in the bond market, the rise of smaller companies, and an incredible rise in public debt levels.
We are a California-based registered investment advisor and investment thought leader, updating you on important things that we saw last quarter and year in global financial markets. This is a modified commentary of what we create for our clients, and you can find the original versions along with proprietary data and charts here.
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U.S. Responds To Pandemic With Record Monetary and Fiscal Measures.
(Conscious Capital Advisors)
2020 was a historic year in many regards. In addition to a global pandemic, we also saw unprecedented monetary action by the Fed, in conjunction with a significant fiscal response from Washington. Chances also are that the fiscal stimulus is not ending. With a newly elected Democratic president and a Democratic congress now in charge, the probability that we will see additional fiscal stimulus in the form of direct payouts and an infrastructure program has increased.
If we examine current price trends on an inter-sector level, we can see that both materials and industrials have rallied sharply relative to other stocks since Q2 2020. We highlighted the possible sector shift to industrials in our last commentary; coincident with rising construction activity during the pandemic and perhaps forecasting additional investment in our nation’s infrastructure.
Inflationary Forces Begin to Build, Yield Curve Steepens, and Rates Rise.
(Conscious Capital Advisors)
Source: Stockcharts.com
The bond market has seen a profound shift in the last few months. We mentioned a significant change in the Fed's policy towards inflation in our previous commentary. This policy shift, along with the unprecedented monetary and fiscal stimulus discussed above, has caused the breakeven rate on Treasury Inflation-Protected Securities (“TIPS”) has moved markedly higher, which is a signal that inflationary pressures may be higher in the future. Because of these expectations, interest rates on the long end have risen, steepening the yield curve.
Inflation has remained somewhat muted in the past decade, so this is a notable change in the economic landscape. As inflationary pressures rise, income assets, including fixed income securities and dividend-generating equities, may suffer. While such investments may play a part in supporting the price stability of a portfolio, additional equities and possible commodity exposures may be necessary to keep the purchasing power of a portfolio in line with rising prices.
Interest in Entrepreneurship Increases as Unemployment Remains Elevated.
(Conscious Capital Advisors)
With the employment situation as challenging as it is because of the pandemic, many desperate Americans are turning to self-employment and entrepreneurship to survive. This trend of non-traditional employment has been occurring since the Great Recession of 2008, but it took the pandemic to bring it to a new level. New business applications have increased substantially, and interest in venture capital fundraising has never been more robust.
Perhaps a signal of entrepreneurship's hope is that small and microcap stocks have begun to outperform their larger-cap peers. While many factors could drive such a rally, including the strong possibility of acquisitions in this low interest rate environment, this is a stark reversal of past trends that favored larger companies' equity. We believe this shift is an encouraging development, as entrepreneurship and innovation may be the solution to America's low growth problem.
U.S. Dollar Under Continued Pressure as Public Debt Grows to Post-WWII Levels.
(Conscious Capital Advisors)
Source: Stockcharts.com
Donald Trump may have presided over one of the most politically controversial periods in U.S. history. Unfortunately, his lasting legacy may be the explosive rise in the national debt during his term. The national debt has risen by almost $7.8 trillion during Trump’s time in office, bringing our debt-to-GDP ratio to around 100%, roughly around the same level the U.S. was at after World War II. Trump’s tax cuts, especially the sharp reduction in the corporate tax rate to 21 percent from 35 percent, were a large factor to the change. Also, higher fiscal stimulus due to the coronavirus pandemic contributed to the rise in the debt-to-GDP ratio.
This increased indebtedness has had a profound effect on the dollar, which has weakened substantially since April. While the U.S. remains one of the strongest safe haven economies globally due to the geographical advantages the country has, there will be a challenge to resolve this issue, especially since the growth of the U.S. is projected to remain below its historical average.
About Joseph Lu, CFA®
Joseph has over a decade of experience as an investment professional, primarily in quantitative analysis and portfolio management roles. He is the founder and managing director of Conscious Capital Advisors and a CFA® Charterholder. The CFA charter is a globally respected, graduate-level investment credential by the CFA Institute, a global association of more than 90,000 investment professionals working in over 133 countries.
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