Each year people make a New Year's resolution in order to change some aspect of their lives - workout more, go on a diet, read a book - you get the idea. I think most of us have been hoping 2021 would be different from 2020 and we could make fresh new resolutions. In some ways it already is different, and in some ways it's not. COVID is still with us and the media continues to feed fear (some things never change). But, the resiliency of the U.S. economy is ever present and we can hopefully put some political turmoil behind us. The rollout of two COVID vaccines began late in 2020 and other vaccines are in the hopper. Here's what we're seeing so far in 2021.
Resiliency of the U.S. Economy. While there were certainly soft patches in the economic data late in 2020, mainly due to increased COVID cases across the country, the economy is still operating with efficiency (as evidenced by the NFCI below). This morning, however, the Jobs Report showed that payrolls declined by 140,000 versus an expected increase of 71,000. While this is disappointing, it's not surprising given the draconian lockdowns in certain states across the country. The sector with the largest decline in jobs, again, no shocker, is in Leisure & Hospitality. While payrolls disappointed, the Unemployment Rate remained at 6.7% and Hourly Earnings increased 0.8%, which was more than the expected +0.25. To put December's decline in perspective, after the 2008 Financial Crisis, monthly Payrolls declined on 6 different occasions as the economy continued to recover. On the plus side this week, the ISM Manufacturing and Services Indices for December improved over November's readings and rose more than expected. Weekly Jobless Claims were steady, but still elevated. What is most interesting about 2020, despite the decline in GDP, jobs, and incomes, the consumer actually managed to be fairly responsible during the pandemic. A recent report by Experian shows that the average FICO credit scores improved by 7 points in 2020 versus 2019. In fact, 2020's average FICO score of 710 is 21 points higher than the average in 2010.
Fiscal Policy Going Forward. Here's what we know after the GA runoff elections - the Democrats now control Congress and the White House. The markets tend to like a stalemate in the legislative and executive branches. So far, however, the markets have not responded negatively to the prospect of Democrat-control of the two branches. What the market seems to like is the prospect of more stimulus being injected into the economy. However, we err on the side of caution. The Biden Tax Plan that was laid out before the election called for tax increases at both the Corporate and Individual tax brackets. If enacted this will hamper growth to some degree. But, we have to keep the markets in perspective at all times. During the last four years of the Obama/Biden administration, the S&P 500 Index grew 88% from re-election 2012 to the election of President Trump in 2016. By contrast, the S&P 500 Index increased 66% from the election of President Trump to the most recent election of President Biden. Unfortunately, the four-year period under President Trump included a 20% drop during COVID. The point? Just because the policies of one administration differ from another does not mean we sell all our securities and move to cash. Instead, talk with your Financial Advisor and make sure your portfolio matches up with your individual risk tolerance, time horizon, and goals.
Outlook for 2021. We look at multiple different economic variables when deciding how to allocate our portfolios at Eudaimonia. However, the market basically boils down to three stools - Fed Policy, Fiscal Policy, and Corporate Earnings. We know, based on recent minutes from December's Federal Reserve meeting, the Fed will keep interest rates low through 2023 and will maintain bond purchases through at least the first half of this year. So, Fed policy is supportive of better earnings and higher GDP. Fiscal Policy, while still up in the air, will likely be more restrictive, both from a regulatory and taxation perspective. The final stool - Corporate Earnings - look to be better in 2021. Analysts are more optimistic about S&P 500 stocks today than they were at the beginning of 2020. In addition, analysts are expecting growth in both earnings and revenues. In fact, earnings for S&P 500 stocks are expected to show the highest year-over-year growth since 2010. With this as a backdrop, we expect equity markets to drive higher this year, but diversification will rule the day, as other regions/asset classes may out-perform traditional U.S. equities.