Quote of the Week
“But we need not to go far, the inquiry ceases at once, for, the time has found us.” – Thomas Paine
This week I am combining the Tech Corner and Larry’s Thoughts into one to give you our economic update and projections for the first quarter of 2021.
“Skate to where the puck’s going to be, not to where it has been” Wayne Gretzky, probably the best ice hockey player in the history of the sport.
As I have been saying for the last few months, we are solidly in economic Quad II. Quad II is characterized by growth increasing and inflation increasing. Quad II, along with Quad I (growth increasing, inflation declining), are the best quadrants for making money. Quad II is especially good for stock prices and commodity prices increasing. So with our portfolios, we have “skated to where the puck is going to be,” and we have been there since the middle of November of 2020.
The data is saying that this is a powerful Quad II. What is really exciting is that the rest of the world is also in Quad II. Based on the data showing the strength of the economic recovery, we and the rest of the world should stay in Quad II through the second quarter of 2021. So it looks like “smooth sailing” at least until June or July.
We believe there should be good news going forward. As tracked by the Gross Domestic Product (GDP), the economy is expected to grow year over year by +11%. This is the largest GDP growth since the end of World War II.
Many things are causing this growth.
First, we have robust consumer demand coming soon. As the effect of the increased vaccine deployment, people will start to come out of their sequestration and begin to spend on things they were unable to spend on for the last ten months. Restaurants, cruise lines, hotels, and most consumer discretionary items will be in high demand. It will be like we have just gotten out of jail, and we will take advantage of our freedom. During the last ten months, people have drastically cut back on consumer discretionary items because they couldn’t spend on them. Now, add this to the mix, since March 2020, Americans have saved 1.55 trillion dollars. This is an immense amount of money waiting to be spent. The University of Michigan says that spending expectations are at a four-year high.
Second, consumer goods inventories are low. This means that a lot of stuff needs to be produced to meet the coming spending wave’s demand. That means that the companies making those goods will increase their revenues. The corporate profit cycle over the next 12 months is expected to increase by over 30%. Remember, higher profits mean higher stock prices.
Third, the Fed is pumping more than $120 billion into the economy every month. More money into the system means there is more money to spend. I don’t see this stopping. President-elect Biden has sent a strong message to the markets by appointing Janet Yellen to be Treasury Secretary. Plus, add in Cecilia Rouse’s appointment to be the head of the Council of Economic Advisors. Those two, along with the Fed chairman Jerome Powell are poised with a mission to address the economic inequality in America. That means the economic floodgates will be wide open to boost the economy.
Okay, where should we be invested to take advantage of “where the puck is now.” First, let’s start where not to be invested. We are currently taking a step away from bonds. With inflation increasing interest rates will be rising, and when interest rates rise, bond values go down. We have already seen that happen. If you are going to refinance or get a new home mortgage, the window is closing.
We are also avoiding Real Estate Investment Trusts and Utilities. Because REITs and Utilities pay a fixed dividend, they act like bond substitutes. Gold is another investment we are avoiding. Gold doesn’t pay interest or dividends, so when interest rates rise, fixed-income investments become more attractive, so investors move out of Gold.
Where do we go? In Quad II, we want to take advantage of inflation, so we invest in commodities, including energy. Because the dollar is going down, we want to invest in currencies of other countries.
Finally, with the economy improving and the consumer’s pent-up demand, and the $1.55 trillion in consumers’ pockets, we want to be in the stock market.
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These are Larry Lof’s opinions and not necessarily those of Cambridge, are for informational purposes only, and should not be construed or acted upon as individualized investment advice. Past performance is not indicative of future results. Due to our compliance review process, delayed dissemination of this commentary occurs.
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Technical analysis represents an observation of past performance and trend, and past performance and trend are no guarantee of future performance, price, or trend. The price movements within capital markets cannot be guaranteed and always remain uncertain. The allocation discussed herein is not designed based on the individual needs of any one specific client or investor. In other words, it is not a customized strategy designed on the specific financial circumstances of the client. Please consult an advisor to discuss your individual situation before making any investments decision. Investing in securities involves risk of loss. Further, depending on the different types of investments, there may be varying degrees of risk including loss of original principal.