Should you have any questions regarding these notes, please do not hesitate to contact Kevin at (678) 401-6102.
Executive Summary
Markets across the globe continue to move higher in hopes that the vaccine rollout will help contain the coronavirus spread and allow for a return to economic normalcy.
The CBO projections, which were updated last week, confirm above trend economic growth and job gains over the next 12 to 24 months.
In their recent meeting, the Federal Reserve Bank pledged to keep interest rates low through 2023, and to continue their Treasury and mortgage bond purchases of $120 billion per month.
Additionally, the ISM manufacturing and service sector reports released last week showed a pickup in growth, and both indices were above pre-COVID-19 levels.
The Horizon Advisor Network Investment Committee met on the afternoon of February 8th, against the backdrop of growing economic and investment optimism.
Growing Economic & Investment Optimism
This is based on a number of factors, including the rollout of vaccines, case numbers continuing to drop, additional stimulus promised by the White House and accommodative Federal Reserve Bank policy. With that setting, we are happy to report that all of the model portfolios tracked by the committee continue to outpace their risk-adjusted benchmarks over the most recent one, three, and five-year periods. The committee is looking at a number of potential adjustments to the models given the recent news and data outlined above.
From an economic standpoint, the markets continue to focus on additional potential stimulus from the new administration. It is important to note, however, that the Congressional Budget Office (CBO) recently upgraded their economic outlook significantly, saying that GDP growth will recover rapidly and return to its pre-pandemic level by mid-year 2021. Given the size and scope of the recession caused by the economic shutdowns and quarantines during the early days of the viral outbreak, this is an enormous feat to achieve in such a short period of time.
Watching Proposed Stimulus Plans Closely
The CBO also stated that they believe that the labor market will continue to rebound, that unemployment rates will continue to fall and that we may be back to pre-pandemic levels in the employment markets by some time in 2022. Importantly, the CBO noted that these upgraded projections are based on stimulus and policy already in place. They DO NOT assume any additional stimulus, including the American Recovery Act, President Biden's $1.9T proposed stimulus plan.
It also does not include the upcoming Build Back Better plan that the Biden administration is planning to unveil within the next month. The green energy and infrastructure spending plan would add an additional $1.5T to $2T of stimulus, all of which would be deficit financed. Many economic pundits, including some well-known names on the left, are wondering why, if the economic recovery is already accelerating, would we want to risk overstimulating the economy and potentially causing inflation, while adding significantly to the deficit. These are all things the committee will continue to watch closely.
Additionally, both the recent reports from the Institute of Supply Management (ISM) on the service sector and the manufacturing sides of the economy were above expectations AND above pre-COVID levels (see chart below). Finally, when 4th quarter earnings season started, we were expecting earnings to fall, on a year over year basis, from record levels achieved during the 4th quarter of 2019 by nearly 9%. Now with approximately 85% of companies reporting, eight out of ten companies have beaten their earnings, and we expect earnings growth to possibly be 3-4% positive. This would be a huge swing and would put the markets on a much better footing from a valuation standpoint.
Markets Do Not Move in Straight Lines
We know that markets have traded up dramatically, and that valuations are stretched, as the markets have moved far above many moving averages and support levels. Therefore, now is a great time for you to consider raising any cash that you may need over the next six to twelve months to help mitigate the impact of market volatility and downturns.
We know that markets do not move in straight lines, and that bouts of volatility, especially given the political and economic uncertainties of the day, could happen at any point in time. These are to be expected, but do not change the overall outlook for the economy and the markets. We know the promise of additional stimulus, along with the rollout of the vaccines, and pledges by the Fed to keep interest rate policy low for an extended period of time, should continue to be additive to both economic growth and risk asset prices including stocks, real estate, and commodities. However, all of the deficit spending, along with low interest rate policies could put downward pressure on the U.S. dollar.
Final Takeaway
The committee is continuing to look for ways to potentially add some additional international and emerging market allocations to a number of our model portfolios.
Thank you so much for your continued trust in the Horizon Advisor Network Investment Committee. We take our responsibility seriously and put an enormous amount of time, energy, and thought into managing the financial resources of you, our trusted friends and clients. Should you have any questions regarding these notes, please do not hesitate to reach out to your advisor.
Should you have any questions regarding these notes, please do not hesitate to contact Kevin at (678) 401-6102.
*Past performance does not guarantee future results.
*Investments in securities do not offer a fix rate of return. Principal, yield and/or share price will fluctuate with changes in market conditions and, when sold or redeemed, you may receive more or less than originally invested. No System or financial planning strategy can guarantee future results.
Members of the Horizon Advisor Network Investment Committee
- Jesse Hurst- Impel Wealth Management
- Clint Gautreau- Horizon Financial Group
- Brian Toma- Freeman Heyne Toma Financial Advisors
- Kevin Myers- ATL Global Advisors
- Nate Ollish- Impel Wealth Management
- Mike Hackler- Horizon Financial Group
- Joy Schlie- Freeman Heyne Toma Financial Advisors