January 2021 | Victoria Bogner, CFP®, CFA, AIF®
The last quarter of 2020 is at a close and like a good movie, it reached some monumental moments of suspense and resolution. At least three viable COVID-19 vaccines were announced, and I wager you know nurses or front-line workers who have already begun to receive them. Now more than ever before, there’s a tangible reality where COVID is no longer the boogie man hiding around the next corner.
But I know a lot of questions remain. Here are some of the top ones I’ve been asked and my thoughts that follow.
1. What could derail the economic recovery?
So far, increasing COVID cases and lockdowns are being countered by fiscal and monetary support until vaccines can be widely deployed. That’s kept the economic recovery in specific areas of the market going like online retail, home improvement, technology, and biotech to name a few. Lockdowns affect the areas of the economy that are still underwater and very much in recession: airlines, cruise lines, restaurants, and brick and mortar retail. What would affect a recovery more broadly are lockdowns without government backstops. At that point, job losses and bankruptcies would mount and create a downward spiral.
Remember that stimulus is a Band-Aid, not a long-term solution. The most effective path to a sustainable economic recovery is vaccines. That drastically reduces the downside risk from COVID heading into next year.
2. Vaccines aren’t at the level they need to be yet. How will the stock market deal with rising infections before the anticipated vaccines are broadly deployed?
Economic growth and stock market performance are related, but you have to remember that the stock market is a forecaster. It looks toward future possibilities more than the here-and-now. From the stock market’s point of view, the anticipated vaccines have a higher economic impact than any short-term disruptions from rising cases or potential lockdowns. Not to get too nerdy, but technically speaking, asset prices (and therefore stock prices) are calculated by discounting the stream of future expected cash flows from that asset. Because interest rates are at record lows, those future cash flows have a higher impact relative to near term cash flows. The short term of what happens pre-vaccine isn’t enough to derail the strong activity that happens after the vaccines.
However, in the short term the stock market is made up of investors, most of which are irrational. Emotions can move the market much more quickly than logic or calculations. Short term volatility could be high, so remember to keep an eye on the horizon and don’t let emotion sweep you under.
3. Isn’t all of this stimulus going to cause runaway inflation?
Eventually yes, I believe it will. But inflation isn’t something that happens overnight, and certainly not on the heels of a recession. In broad strokes, inflation has three ingredients: anticipation, lack of supply, and pent-up demand. Those three ingredients also vary across different sectors of the market. In 2022, we may see a huge demand for travel, which would increase costs associated with that. But it wouldn’t necessarily affect how much a loaf of bread costs.
Something easy to watch in terms of inflation is unemployment, which would need to be a lot lower than it is now. More people working means more money changing hands and more wage pressure on employers. Until the unemployment rate is back to pre-2020 levels, I believe broad inflation will be kept in check.
4. I still have my cash on the sidelines and I missed the dip. Is now still a good time to invest it?
One of the most common mistakes I see investors make is mistaking market timing for investing. Reaching your goals is not about trying to time the market. It’s about putting your money to work in a way that helps you reach those goals. That said, with how bullish we are about 2021, we believe there’s plenty of runway for stocks to continue to rise. If we do get short term market corrections, those are additional opportunities to add to your positions. In the meantime, don’t try to time the market. Invest according to your goals.
Are there still risks? Of course, there always are. But with vaccines, low interest rates, and more stimulus to come, 2021 has the potential rocket fuel to be an incredible year for market returns.
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