Transcript

Hi, Everyone. Welcome to the Wiser Financial Advisor with Josh Nelson, where we get real, we get honest, and we get clear about the financial world and your money.
This is Josh Nelson, Certified Financial Planner and founder and CEO of Keystone Financial Services. We love feedback and we’d love it if you would pass it on to me directly at josh@keystonefinancial.com . Also, please stay plugged in with us and get updates on episodes and help us promote the podcast. You can subscribe to us at Apple podcasts, Spotify, or your favorite podcast service. Let the financial fun begin!
Today we are talking about Forecast 2021. It’s interesting, because I am having flashbacks to Forecast 2020 when we were actually talking about a lot of stuff—but not about Covid. A year ago, I had my presentation ready to go and Jeremy and I were getting ready to get up and give it. As I was going around talking to a few folks in the crowd, somebody mentioned, “Hey, did you hear about this Covid thing? It sounds like it could be some kind of an outbreak.” At that point nobody knew anything about how things were going to shake out but January and February of last year things were looking quite good. Our forecast was pretty positive for the year 2020—although we did predict that volatility would increase throughout the year, and it certainly did in a big way. But what I want to talk about today is a flyover of the Keystone Financial views on the economy coming up into this year of 2021.

I think a lot of people are wondering if this is going to be another year like last year. Is the economy going to be just as shaky as it was in 2020? Well, as we get going here, we like to divide things into a few different sections—

where we’ve been
where we are
where we may be going

Starting with where we’ve been: Clearly this last year has been dominated by the Covid-19 pandemic. There was a lot of government intervention that came into the economy that boosted the markets through the remainder of the year. The fuel that got pumped into the economy was twofold:

Number one, the fiscal stimulus that came from trillions of dollars approved by Congress and signed off by the president.
Number two, monetary stimulus when the Federal Reserve jumped in and made some big moves by lowering interest rates to zero very quickly and then also ramping up their quantitative easing program to put a lot of cash back into the economy.

Think of the economy as a semi that’s loaded up with a ton of weight and trying to go up a hill. If it was going really slow before it started that hill, it takes a long time. (Here in Colorado, we have a lot of semis going through the mountains. You don’t want to get stuck behind one, especially if it’s just beginning to get up momentum.)

In the early part of last year, things were ticking along quite well. GDP (Gross Domestic Product) was good, earnings were good, and unemployment was at record lows. It looked like everything was clicking along for us to have a great 2020 financially. Then the unexpected happened and the stock market tends to be more like a race car in that it can react very quickly. It can slow down fast and speed up fast and that’s what happened in March of last year. The market took a nosedive after it became apparent that Covid-19 was going to be a very big deal and that globally the economy was going to shut down in a big way. Then throughout the year we had to regain some momentum and that’s what the remainder of the year was about.

The economy never goes to zero, never stops completely. So even though it may have felt that way, there were still segments of the economy that were moving. They were slower than they had been, but overall the struggle through the remainder of the year was because we went in fits and starts with opening and closing—and in the last quarter Covid-19 cases started spiking again. There wasn’t a second stimulus from the government until late in December to boost things.

Employment really stalled out, especially back in March and April when there were a lot of layoffs. Many people became unemployed that had been employed before. Many of those affected were restaurant workers, people in the travel industry, the bar industry, hospitality, any of those areas were disproportionately impacted.

Then we ended up seeing the financial numbers continuing to get better through much of 2020. They tabled off through the end of the year when there was a resurgence of the virus.

So as we go through 2021, we think those numbers are going to keep getting better; that employment situations are going to continue to get better into next year. In 2022 and 2023, unemployment numbers are expected to go back down to where we were in early 2020, very low unemployment, where the challenge will be more about the employer finding enough good employees. That’s what I was hearing a year ago from employers, that their biggest challenge was trying to find employees because everybody who wanted a job had a job.

In 2020, consumers were spending but they slowed way down. We got scared back in March and April of last year while we were all kind of stuck in our houses. A lot of spending really went down. It resurged in parts of the year as people spent money on their yards and their houses, on campers and boats and all kinds of stuff. Spending did not go to zero. Consumers, including myself, as we got more comfortable and realized that this would not be the end of the world, got a little more liberal with our pocketbooks and started spending again.

Why do we talk about unemployment and consumer spending? Because they go hand in hand. Seventy percent of the economy is consumer spending—that’s just you and I spending money on stuff. So it’s very important that people have jobs and have cash in their pockets. If they have cash in their pockets, more than likely they’re going to spend it, and that will help the economy.

The analogy of the semi and the sports car applies to the fits and starts in the economy and the market going up and down through the remainder of the year as everybody was trying to absorb what all this meant. Anxiety levels were pretty high last year for lots of reasons—not just because of the pandemic. There was a lot of social unrest and political unrest. 2020 was an eventful year. In January of last year we thought, “Hey, this could be kind of a boring year—a boring good year.” And although the end result as far as the market is concerned was not a bad thing, certainly it was a very volatile year, so for people who don’t like volatility, it probably was not your favorite year.

Here’s some context: The stock market sped past the economy like a racing sports car. And that’s always the case. The stock market, aka the sports car in this story, is always trying to get 6 to 12 months in the future to see where we’re going. Last year was the end of the longest bull market in history—and it was the shortest bear market in history. That’s the good news—that the bear market we experienced in March and April of last year was very short. Things started popping back up because once the government money started coming in, it was very apparent that we were not going to be without a lot of money being pumped into the economy to keep things going. The market recognized that it’s going to end up being okay and eventually the pandemic will run its course. There definitely was some mixed reaction there. Again, think of the sports car and the semi if you’re trying to figure out why the market is up so much when the economy is still struggling.

So, ultimately it was a very bumpy year, a volatile year, one of the highest volatility years in recent history. The ones before this last year would have been back to the financial crisis of 2008-2009 and then in the early 2000s. Other than that, we’ve been going through a time when volatility has been quite low for a number of years. And so, a lot of people ended up being quite surprised when they started seeing all the turbulence.

During a lot of the year, the stock market was fueled by growth stocks—that is, tech companies or big companies such as Netflix, Google, Amazon that are really changing the way the world works. Toward the end of last year in November and December we saw some rotation with different sectors of the economy stepping up—things like pharmaceuticals, value companies like financial companies, energy companies, things on that side of the equation that started doing quite well. That’s a good thing if you’re a diversified investor, and also instructive. It helps us remember that we always want to stay diversified and never want to make big bets. If you make bets, eventually you will end up being wrong and there could be a lot of loss associated with that.

Anyway, the stock market ended up having a great year in 2020. It ended up hitting record highs. At that same time earnings were starting to get better. Some questions right now are around valuations in the stock market. Is the market too high relative to earnings? Historically yes, we are at fairly high point right now. Earnings will have to get better. Earnings will have to catch up with prices. I think that will end up happening here in 2021-2022 because earnings are expected to rebound as businesses are allowed to open back up and operate at full capacity.

To sum up, there were a number of reasons why the market did well last year. The Federal Reserve pumped a lot of money into the economy and kept rates low and there were government stimulus programs in the trillions of dollars. We’ve never had that kind of stimulus coming into the economy before.

Now, could there be long-term consequences? Yes, there could regarding how do we pay off that debt? That’s in the future, though. That’s not a short-term problem, it’s more of an intermediate to long-term problem that we will have to wrestle with.

Also, the FAANG stocks of Facebook Apple Amazon Netflix Google and other companies such as Tesla and SpaceX have had a profound impact on the markets and in the way we live. So the stock market looks ahead 6 to 12 months and we are in a very low interest rate environment. Where we find ourselves today is that a lot of people are working from home and schooling from home. As we find the vaccine starting to have a positive impact and as more and more people get immune to Covid, we do expect more people will return to the physical workplace.
We’ve all been in the virtual workplace to some extent over this past year but more things will go back to some level of normal. Kids will start going back into schools. Schools in many areas are already operating at least in a hybrid capacity.

Interestingly, looking forward a lot of people are bullish. According to the AAII Investor Sentiment Survey, at least half of the people surveyed in December of 2020 were bullish. Of course, that means half the people were bearish but ultimately, we do not find overall pessimism. In fact, I think a lot of people are very optimistic about the future. That big market rotation toward the end of last year shows more sectors participating in the growth of the stock market; we’re seeing this rotation from growth to value stocks and from large to small stocks, from defensive companies to cyclical companies; from stay-at-home companies like Zoom to out-and-about companies like Royal Caribbean or any airline—even those businesses will get back up and running eventually. All of this underscores why we want to stay diversified.

Yes, there is a rough road ahead of us. I think there’s still a lot of uncertainty. I would definitely not be in the camp of saying that we’re out of the woods and everything is great. There are some challenges ahead. One of those is vaccine delivery. That’s happening in fits and starts depending on where you live. Might be working great or it might not be. I’m from Iowa originally and I hear from people back in Iowa that it’s a mess and very few have been vaccinated. I talk to family down in Arizona and they say it’s working great. So anyway, vaccines are happening in fits and starts but it is starting to make a difference. We are starting to see some statistics that support the cases starting to drop and severe illness or death starting to drop. That’s a good sign and we hope that continues.

Unemployment should continue to get better but it’s still at elevated levels right now. There’s been some creative destruction in all of this because whenever you go through some kind of major event, a lot of businesses figure out how they could be more flexible and adaptable and more efficient. Sometimes they figure out that being more efficient results in less workers and they can operate with fewer employees. So that’s one thing to keep in mind as a rotation takes place, people need to be adaptable in the workforce. If you’re any type of business owner, you already know this because that’s the only way you survived—by being adaptable as a business. But employees of companies also need to be adaptable—willing to move, willing to take on new skills as things continue to change in the future with innovation and new opportunities coming out.

There has been a lot of small business destruction. Some studies I’ve seen say that during this pandemic and all the changes happening, up to half of all small businesses could either be sharply diminished or maybe even go away as a result. Many of those are very small businesses like caterers or hairdressers. Certainly restaurants. We’ve seen many businesses go away because of the shutdown and the events of the last year.

More economic relief is almost certain to happen with the political outcomes that we saw in the elections. There’s almost certain to be a huge amount of stimulus continuing to come into the economy. And then there are worries about economic safety nets and who is benefiting and who is not. That’s up for debate which will happen for years and years.

There’s been a huge difference in housing. There’s been a housing boom believe it or not, largely fueled by people spending more time at home. People may feel less satisfied with their home if they’re at home all the time. They start to see things like, “We’d like a nicer backyard. We’d like a new deck. Or maybe we would just like a different type of home.” We’ve seen a lot of people moving or upgrading homes as they realize that the time spent at home both for their kids and for themselves is going up. Some of them realize that, “Hey, some of this is probably permanent, this work from home.” Many companies are finding that their employees are far more productive at home. By and large, studies show that employees like the flexibility of working from home at least part of the time now that they’ve had that experience.

Savings rates have gone up. That’s a good thing from a personal standpoint. Maybe not so much for the economy because the economy needs people to spend that money, but ultimately savings rates have gone up. People got scared; we all had a wake-up call in the spring of 2020 when the market dropped 30% within a couple of weeks. Everybody got really concerned wondering how bad this was going to be—for their job, for their business, for the economy. Everybody got a little scared which is probably a healthy thing as far as re-evaluating. “Hey, do we need to pay off our debt? Do we need to keep more in cash? Do we need to watch our spending a bit more?” A lot of people have re-examined debt. That’s why those savings rates have gone up.

There’s been huge disruption. And this is a good thing in the long run. It brings sustained innovation and technology adoption for things that we didn’t even know about before. How many people had heard of the company Zoom a year ago? Now we’re all familiar with it because we’ve had to use it. Maybe you enjoy using it in daily life for doctor appointments and business appointments, things like that. Here at Keystone, we’ve actually found it has made us more productive and far more flexible as we’re able to jump on calls together and to be in touch with our clients. So, some good things have come out of this and there will be lots of things to come in the future. Things like 3D printing, space exploration, really a lot of the technologies that our clients are working in. Those of our clients that own businesses or are employees of companies, many of you are working on this stuff right now. It’s just fascinating to look at where the future might lead us. Part of that will be the demand for cleaner energy and cleaner cars. The economics of that are starting to match up as the gap between say a hybrid vehicle and its gas equivalent is starting to narrow. I’m hearing that within the next few years the hybrid versions of vehicles will be economically viable—in other words people won’t just buy them for altruistic reasons; they’ll start buying them because it saves them money. Up until this point, it’s been more of a luxury or just a personal preference for people to have those types of vehicles. In the future, it’s going to become an economically sound choice across the board. And as we see that type of innovation, it’s fun to witness and to think about the implications for the planet and the way we live.

In considering the pursuit of social justice, people have different definitions of what that means. Over the last year there’s been a lot of debate about things like race and sex and how people are living their lives. That’s nothing new for us as a nation. We’ve always done that. We’ve always had rigorous debates about how we live and how the government gets involved in certain things. That’s going to continue to be a theme as we go forward.

So the growth outlook: over all we do expect the economy to grow. In most countries in the world, the average expected growth is about 5.2% in 2021. That’s the GDP estimate from the IMF (International Monetary Fund). They estimate about 5.2% growth globally. That’s actually a very good number historically, but remember we’re climbing out of a hole from last year. The US is expected to grow at 3. 1% again, which is about our historical average if you look at the last hundred years or so. Remember, we’re climbing out of a recession; remember that semi we talked about before that slowed way down to just a crawl last spring. We’re just gradually getting things going again to get the economy back up to where it was before. There are some risks, as we talked about, among them the vaccine effectiveness and the pace of the recovery. We don’t know exactly what that’s going to look like and how consumers will play into that. Remember, 70% of the economy is just us spending money on stuff. How soon will people feel comfortable traveling? How soon will people joke about going out and spending like they did before? How soon will people start to go out to eat like they did before? These are all things that will have big implications as far as the economy and different businesses that we all use.

U.S. and China tensions is something else to consider. There are tensions in many parts of the world but the U.S. and China are the number one and number two economies. If we go at it, that’s something that’s going to create volatility. We do need each other and there’s a lot of evidence for that because if we completely cut off trade from each other that would be really bad for both countries. I don’t see that happening but I do see that there will be continued tensions.

Investor behavior is another factor. This year we’ve seen a lot more individual traders. They may be bored or out of work but they’re jumping in there doing stock trading. On social media some of these people are teaming up and placing trades together which is causing huge volatility in some of these individual stocks.

High debt level is one thing that we are concerned about and monitoring. The debt levels are very elevated and they always do get to be elevated when we hit a recession. The market takes a hit, the economy takes a hit, and the government steps in. They do that by borrowing money, so we do need to keep an eye on that. Long-term, it’s not sustainable to keep such high debt levels, so we do expect that over the next couple of years as the economy gets going again, the government spending will start to abate.

There are likely to be tax changes in the future to address all that debt and unfunded stuff going forward. Tax rates are probably going up. Federal income tax rates almost certainly will go up in the future, could be as early as 2022. We won’t see anything happening in 2021 simply because there’s not much time to increase tax rates and also if you’re increasing tax rates, you’re taking money away from individuals and giving it to the government to spend. That has a contracting effect on the economy. increasing income tax rates is not something that politicians are likely to do when the economy is so weak.

So ultimately, we do think this is going to be a recovery year. We do see that things are going to be okay in 2021 as things start to get more and more normal. Who knows what that looks like, right? Will we be getting back to some level of businesses being able to operate like they normally would and consumers being able to travel and go out to eat and do what they normally do? Will our kids go to school and play soccer and all the stuff we were used to doing before?

Will it all look different? Absolutely. Is that a bad thing? Not necessarily. Some of these things can end up being good things. I know they have for my own life and for many of you. I’m sure you have lots of stories to tell that when “bad stuff” happens we probably don’t like it in the moment. We think it’s bad. We wish that it hadn’t happened, whatever that might be; it could even be tragedy—something like Covid or people passing away. But I think if we’re looking for good; if we’re looking for what could be great about something, even something that might seem bad on the surface, we will always find something.

Ultimately many business owners, myself included, say that 2020 was a good year simply because we were forced to change. We were forced to innovate, and quickly. We were forced to adapt to serve our clients and add value during a time when there was a lot of question about the certainty of the systems of the world and people’s health. That was our opportunity to step up and serve our clients.

Well, that’s s all I’ve got for today. I hope it’s enjoyable to you. We have a little bit longer version of this on our YouTube channel. Just go to Keystonefinancial.com and you’ll see the video version with slides from Jeremy. It’s twice as long if you’re really interested.

Otherwise, thank you so much for being here today. Thank you for giving your time. That’s your most valuable resource. We so appreciate the relationship that we get to have with you and certainly want to wish you the very best 2021. God bless and take care.

The opinions voiced in this episode of the Wiser Financial Advisor with host Josh Nelson are for general information only and not intended to provide specific advice or recommendations for any individual. Investment advisory services offered through Keystone Financial Services, an SEC Registered Investment Advisor.