Volume 92 No. 2 - February 2021
The National Confectioners Association website, Candyusa.com, (maybe the best name ever for a website) reported online candy sales during the middle of 2020 surged more than 100%. Stressful times have many of us reaching for sugar, and the COVID pandemic has us ordering more candy online and from our local grocery stores than ever before.
All that candy means we consume more sugar. All that sugar activates the dopamine receptors in our brains, which generate good feelings and help reduce stress. That’s great for the moment, but, eventually we have to face our lives in broader terms than getting through the next day or week. We need a plan for long-term survival.
We can’t just keep consuming sugar on every bad day.
Economic stimulus packages have a similar impact on our economy: They feel great in the short-term, however they are unsustainable in the long-term. As with overconsumption of candy, there are foreseeable unpleasant consequences of excessive Government stimulus.
Throughout the pandemic, our economy has received massive injections of stimulus money. Last spring, as the pandemic found its footing in the US, Congress passed economic relief measures worth more than $2 trillion. In December, they approved another $900 billion in stimulus money. A new stimulus package, the first of the Biden era, could mean another $1.9 trillion injection into the US economy soon and even more on the horizon.
The stimulus funds seem to have succeeded in fending off the worst economic effects of the pandemic for many. They’ve also bolstered the US stock market. The bear market of 2020 was one of the shortest on record. Although the US economy shrank about 3.5% in 2020, the damage might have been much worse without the effects of the stimulus packages.
Indeed, despite the pandemic and its human and economic tolls, the US has entered a new leg of a bull market, less than a year after the pandemic ended our last bull market. During 2020, the Dow Jones Industrial Average finished up 9.7% while the S&P 500 climbed some 18% during the year. Homes are selling faster than they have since 2017. All this occurred against the backdrop of a once-in-a-century pandemic, social unrest, and unprecedented political uncertainty.
To almost everyone’s surprise, the markets are at or near all-time highs. Why? The stimulus packages have injected money, and life into the economy, albeit artificially. The stimulus funds have us all—US equity markets included—on a sugar high.
We’ve injected so much money into our hobbled economy—the 2020 stimulus packages equate to about 14% of our country’s 2020 GDP—that the US Dollar has sunk from €0.90 in January to €0.81 by year’s end. When the dollar sinks, stocks often rise. When this happens, we become richer in US dollars, but poorer on the world’s economic stage.
With the hope and optimism now washing over much of the country as COVID-19 vaccination efforts are underway, political uncertainty is resolving, and the light at the end of the pandemic tunnel is becoming brighter, we expect equity performance will continue to accelerate in the short-term. However, as with someone consuming only sugar, the day of reckoning will come for these stimulus packages. We will have to right our economic ship and pay back these stimulus packages at some point. The result will be a combination of higher inflation, higher taxes and lower government services. As our economy comes down from the sugar high, the markets will respond with greater volatility while they absorb the current elevated price levels.
Looking Toward 2021 and Beyond
It’s not so hard to understand where we stand right now, economically, as a country. Suppose you and your family depleted your savings, maxed out all your credit cards and spent everything, bolstering your standard of living. Things would seem pretty good in the moment. You might purchase the car you’ve always wanted, move to a bigger house, buy expensive electronics, and pursue costly hobbies. But, the day of reckoning would come, down the road, because you’re borrowing from the future to enjoy today.
Our country is no different. To stave off the effects of the pandemic, the US injected trillions of dollars into the economy—a significant portion of our annual GDP. While these injections have lessened the pain of the pandemic for many, we will bear the costs in the future.
These realities inform our investment strategies and the composition of our investment portfolios. It is important to have the patience to “buy and hold,” but we can’t “buy and forget.” Since late 2019, Investment Counsel has monitored the markets for growing uncertainties. We analyzed our positions and the companies on our approved stock list. We pared down our equity holdings and focused on the companies we felt were best equipped to weather an economic slowdown or storm.
In 2021, we will continue to emphasize strong balance sheets, the continued ability to pay dividends, and the ability to weather economic uncertainty in the companies we add to our approved stock list. However, with this year’s changes in our country’s economic and political spheres—and amidst changing federal government priorities—we see opportunities to review our approved stock list now and take new positions for these new times.
Watching the Future Form
No one could have predicted 2020, with its political, social, and economic turmoil. However, the pieces are coming together. We can start to see reality forming, beyond the collective sugar high of the stimulus packages.
Although the economic catastrophes brought on by the COVID-19 pandemic left the US government with no real options beyond increasing spending through stimulus packages, our post-pandemic government will have to pull back spending and reduce the debt we have created. The weight of our pandemic stimulus packages will weigh down on our future economy.
The wager is that the economic activity and prosperity that these stimulus packages create will be enough to buoy our economy when government spending is eventually pulled back.
We believe that the stocks on our approved stock list are the ones to target, right now in our times. As we move further into our new year and a new administration, we will continue to be vigilant and watch as we come down from the current sugar high.
Investment Counsel Inc. is a registered investment adviser. Information presented is for educational purposes only. It should not be considered specific investment advice, does not take into consideration your specific situation, and does not intend to make an offer or solicitation for the sale or purchase of any securities or investment strategies. Investments involve risk and are not guaranteed. Be sure to consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein.