January 11th – 16th

THE WEEK IN REVIEW: Jan. 10 – 16

Markets waited all week for Joe Biden’s plan

The markets continued to move higher last week, as we waited for President-elect Joe Biden’s stimulus proposal on Thursday. The new stimulus plan would cost nearly $2 trillion, so with the $900 billion approved in December added to the tally, we are close to the $3 trillion Democrats asked for all summer long.

What’s in the new stimulus package? For starters, there’s $400 billion to fight the pandemic, including $20 billion for a national vaccination program and $50 billion for expanded COVID-19 testing. The plan also includes $1,400 direct payments to individuals, bringing the total up to $2,000 when the $600 from last month’s stimulus is included. More unemployment benefits and a $15/hour federal minimum wage are also part of the package.

I am not the GAO (Government Accountability Office), but I don’t think that adds up to $1.9 trillion. So, where’s the rest going? Well, $350 billion will go to state and local governments with budget shortfalls, much of which was self-inflicted via lockdowns or underwater pension plans; $170 billion will go to K-12 schools and higher education. If you consider all the stimulus from Congress in the name of coronavirus relief, we are over $5 trillion; add to that the liquidity from the Federal Reserve, and now we are well over $10 trillion that has been made available. There are also plans for another massive spending package in February.

My concerns here are simple: Will all this spending right the ship? If the borrowed funds go to things like student debt cancellation and funding failed state pensions (both of which the virus did not cause) without meaningful reforms to ensure we are not placed in that vulnerable place again, it would be foolish. Where will the funds come from? More taxes? More borrowing? Both options will likely result in less flexibility for future crises that may arise. If the money is spent on special interests, how can we be sure that it was used to combat the coronavirus? In the short term, the markets like the flood of cash, and with rates still low there are not many places to invest, so the stock market is thriving.

Second time around?

President Donald Trump became the first president to be impeached twice, but it was the third time articles were brought against him in the House. The first time was in December 2017 on the basis of “Associating the Presidency with White Nationalism, neo-Nazism and Hatred” and “Inciting Hatred and Hostility.” It was defeated 364-58, but Republicans controlled both chambers of Congress at that time. And we already spoke about the second effort regarding quid pro quo with Ukraine; that resulted in impeachment in the House and moved to the Republican-controlled Senate for a vote, where Trump was acquitted.

Last week, Trump was accused of inciting a riot that led to people storming the Capitol on Jan. 6, and he was impeached exactly one week after those events transpired. The matter now stands with the Senate, which still requires a two-thirds vote to convict despite changing hands. Given that Trump’s term will end Wednesday, in my opinion, it would not seem a good use of time and effort to pursue the matter. Trump’s political future is rather dim at the moment; some constitutional scholars disagree whether it is even possible to pursue impeachment once an individual has left office. Plus there are other pressing matters that need to be addressed: coronavirus relief, vaccine rollouts and the reinvigoration of the economy, just to name a few.

The market seemed to look past all this during the week, as we ground higher in anticipation of more stimulus. And we do need it now. With the recent delays and disruptions in the vaccine rollouts, we need both stimulus and a renewed effort to get people vaccinated (which in itself is proving to be a challenge, as upwards of 30% of citizens say they will not get vaccinated). With unemployment climbing and the economy sputtering, the stock markets are almost surreally oblivious to this delicate and tenuous situation.

What’s next?

Last week we began a conversation about what we can expect in the months ahead. The levels of debt issued, both in the past year and in the weeks to come, have been unprecedented and historic. As I said before, by my estimates, if we stop now or very soon, we may find a way to live with the debt we have accumulated thus far. But much the same way you drop a large rock into a pond, you never know the full effects of the ripples.

There has been a lot of discussion regarding stock market valuations as we hit new highs. If you are concerned that there will be a catastrophic failure of our banking system, then you should consider what you would need in a barter economy because the financial markets would cease to exist. I am not a fan of gold (you can’t eat it or use it to keep warm) or cryptocurrencies, because if there are no banks, there will be no blockchains or servers. Plus you might forget your password. (Neither AEWM nor AEWM advisors sell or assist in the buying or selling of gold or cryptocurrencies).

If you think we are in for volatility, higher inflation and rising interest rates, pull up a chair. First, I would suggest that you revisit your comfort level with volatile markets. (Fortunately, you only have to go back as far as March 2020 to find a volatile market.) If you are fine with your current allocation and have a longer horizon, stay the course. If you are nervous in the near term, I’d suggest looking at your current equity allocation and focusing on increasing exposure in equities to larger value and dividend-paying opportunities. If you really need to do something, consider backing off a notch on your allocations toward a more conservative posture. If they fit your portfolio, you might consider alternatives like real estate or shorten your duration in bonds to guard against interest rates.

My logic is simple: We are sailing uncharted waters, and it is far better to be cautiously moving forward than to be the lead dog. In my opinion, there is a significant chance that something unfavorable happens in the next six months. I am not one of those who thinks we will see the Dow at 40,000 as we end 2021. These are my views on how I currently assess the markets, and each investor will have different objectives. It is imperative to continue the conversation, especially with your advisor.

Coming this Week

Have a great week!

Tom Siomades