In the End, we all become stories.
I often start these newsletters by telling a story. This month I want to tell two, the first is probably not true while the second one is. The first story goes like this: Joseph Kennedy (JFK’s father) was on Wall Street for some meetings in the September of 1929 and sat for a shoe shine. The shoe shine boy asks him why he’s there and he tells him he has meetings with his broker about his investments. The shoe shine boy then starts telling Kennedy about his investments, how well they’re doing and how he’ll be able to quit being a shoe shine boy pretty soon. Kennedy give the kid a big tip, thanks him for “the best investment advice he’s ever gotten” and goes into the meeting with his broker and sells all his investments right before the 1929 crash – thinking that if the shoe shine boys think they can get rich then the markets are probably due for a correction. I have also heard this story where it’s Andrew Mellon and a cab driver. Now for the true tale; which if you’ve been a client of mine for a while, I’ve probably told you before. Back in early 1998 one of the largest investment managers in the country was Jeffrey Vinik. If I go into specific company names the compliance people don’t like it, so I’ll leave it there. He began to worry that the tech boom was overdone and the markets would soon go down, so he got very defensive in his investments. He sold stocks and bought more bonds and cash holdings. 1998 ended with a market return (measured by the S&P 500) of over 28% and in 1999 the market returned over 21%. Vinik was fired and all his defensive moves were reversed, right before the market then did finally turn downward from 2000-2002. All this Robinhood / Reddit crazy market moves stuff reminds me a lot of that Joe Kennedy story. But whenever I’m worried and think about making major moves in assets to try and counter a possibly overheated market, I remember the Vinik story and what can happen if you’re right but at the wrong time. I much prefer to stick to what we know, rather than what we think might happen and the things we know lead me to believe we’re doing the best we can with the available information.
As for things we know. When it comes to the crazy trading on Wall Street, we know it has been fueled by the ability to pay no transaction fees and purchase fractional shares and options – meaning you don’t have to have $100 to buy a stock priced at $100 a share, you can buy 10% of a share for $10. When things are free, people want them, even if they wouldn’t want them at a small price. Many experiments have been done on this subject, one notably at MIT. The MIT experiment showed that when faced with paying something for a product, no matter how small the price, the standard cost /benefit analysis was still done by consumers. For example, if a soda is only 25 cents people who drink soda will load up on sodas, but people who don’t drink soda will not get one just because the price is so low. When you make that same thing free, however, the usual metrics go out the window. Even people who don’t drink soda, or have no intention of drinking the soda, will grab a free soda. When asked why they took the sodas, the subjects will usually say something like “why not, it was free anyway.” This “why not” attitude seems to be prevailing on these trading apps, if you can trade for free then you might as well do a lot of trading, even as we know from over a hundred years of experience that you should buy stocks to hold for the long-term. Does this affect the overall markets? Is this a Joe Kennedy moment? Not yet to answer the first question and only time will tell answers the second. But since stock holdings are long-term investments you shouldn’t let this short-term thinking affect how you invest for your personal future.
Another thing we know, is that the economy is improving albeit slowly and the rollout of the vaccine is what’s most important for that recovery. The Congressional Budget Office’s initial 2020 GDP report showed growth at -3.5% and projects 2021 growth at positive 3.7%. That would make us even with 2019 when you average the two years together. They then project growth in the mid 2’s over the next five years. That’s hardly the level of economic growth that justifies recent stock market rises. But we also have inflation expectations that are basically flat. So, 2.7% growth in a 1% inflation world is real growth at 1.7%. The best economic growth number of the last twenty years was in 2004, when the economy grew 3.8% - yet inflation ran 2.7% that year meaning the real growth was only 1.1%. As of this writing we just hit 2 million vaccinations per day, short of the 3 million per day we need to get most people vaccinated by summer – but three weeks ago we were at half that many people. One thing the United States does very well is logistics, and now that we’ve figured out some of the logistics, I’m hopeful we’ll be at that 3 million a day mark very soon. We are also going to get another 1.9 Trillion-dollar stimulus package, which means long-term we’re borrowing more money from our kids, but short-term means the economy should be able to ride out these next few months. If anything, the package might be too much money, which would once again justify some of these high stock prices as a lot of that money is sure to find its way into the accounts of those companies, if not into the stock market directly.
We also know that the depository account balances (think checking and savings accounts) in the United States are currently about $2 Trillion dollars more than at this time last year. People whose income hasn’t been affected by the pandemic have had less places to spend their money, and maybe gotten some stimulus checks and other assistance as well. A lot of that money is sure to be spent once the pandemic is over, even as the average savings balances will hopefully stay somewhat higher than the pathetic level they were at before Covid-19. There’s a thought that the very young may end up being much thriftier than their parents and grandparents have been, as we saw with the generation that grew up in the Great Depression, and maybe that’s the case. But those young people aren’t drivers of the economy just yet, so once again that’s a long-term problem. In the shorter term, this “pent-up demand” theory also points to increases in spending that would once again, perhaps justify the current levels of the investment markets. I remain of the opinion that the markets are both too high and fairly valued at the same time, because they are not one ubiquitous thing, but the shares of many individual companies. A lot of those companies do have stock prices that are probably too high by any metric, but a lot of other ones have been left behind in these past rallies and should actually be higher. We’re trying to tilt our portfolios toward those companies, so even if “the market” suffers a correction we hope to isolate our portfolios from the full impact of that possibility.
We know that the Biden administration wants to do a lot of things. Some of those things will be done as part of this Covid relief package, including perhaps an increase in the minimum wage over the next few years to $15 / hr. But like a lot of the things Biden may want to do, there are the realities of Congress to deal with. If you watch the machinations day by day it does you absolutely no good. Take the $1,400 relief checks. Over the past couple of days, as of this writing, there has been speculation they might bring down the income limit for getting that money, so instead of phasing out at $100,000 of income the checks would phase out at $50,000. (This is a simplification.) Sometimes these are not legitimate proposals, they are floated by a group of Congresspeople or Senators just to see what the public opinion is over a few days. Sometimes they are legitimate proposals that will determine whether or not a bill will pass. If you want to spend all your time digging into the minutia of Washington you can probably figure out which is which, but why bother? When a bill actually gets passed, then we’ll discuss the impact. For the most part, the big things that are on Biden’s eventual agenda that affect my clients are tax rates, the Capital Gains Step-up rules and a possible financial transaction tax. But like I said last time, all the energy is being put toward this relief package and vaccine roll-out. So, I’m not sure a tax package could even be passed that would take affect in 2022 and certainly not this year. Do I have opinions about this stuff? Oh yes, ask anybody who knows me, I have opinions about everything – but I’m not going to be changing around client portfolios for things that might happen.
We also know our clients. We know how much you’re taking from your portfolios and how much you might need in the near future and we have portfolios that are positioned to have that money not subject to this combination of known and unknown factors. That way we don’t have to worry about missing the lesson of the shoe shine boy, or heeding that lesson way, way too early. Mark Twain famously said, “History doesn’t repeat, but it rhymes” and there are several things about the current markets that seem to rhyme with 1999 and 2007. But there are also circumstances that are totally different. Coming out of the last pandemic, which followed a devastating World War, the U.S. economy saw some of the highest economic growth in our history as those who survived wanted to live life to the fullest. The roaring 20’s was the result, and while it didn’t end well economically, it went on for a long time before the bill came due. Our current situation has rhymes with that historic precedent as well. We’ll know what happened when we get there, but in the meantime, we’ll act on what we know and not what we speculate about and always have your personal situation top of mind when we make those decisions.
As always, if you need anything, please give us a call. We are accepting new clients, so if you know anyone who might need some help, we’d love the opportunity.