“We all need to wait until 2023 to see what history we rhyme with.” – Mark Twain
Wednesday morning, I spent an hour on the phone listening to comments by one of my favorite economists, Brian Wesbury. He is the Chief Economist for First Trust Portfolios, a company that produces Exchange Traded Funds (ETFs) and Unit Investment Trusts (UITs) that we use in some of our clients’ investment portfolios.
I’ve listened to Brian for years, especially in early 2020 when the COVID-19 pandemic was starting to become a real thing in our lives. When most media outlets were declaring the end was near, Brian and his team were some of the few voices saying things in the economy were going to be okay.
The theme of Wednesday’s conference call was that there are some things out there that are cause for some concern in the long-term. However, with so many things changing rapidly (COVID numbers, government spending, states reopening, new presidential administration, potential tax legislation) it is difficult to predict what will happen in our economy past 2022.
Hence, my manufactured Mark Twain quote above. Mr. Twain actually said, “History doesn’t repeat itself, but it does rhyme.” To apply that quote to our current situation, I say that even though this might be new territory for us as a country, we’ve seen similar things and we’ve gotten through it.
Now, some bullet points from Brian Wesbury’s remarks that I think are applicable to you:
- COVID-19 is in decline—from the peak of the pandemic in the US
- New cases are down 78%
- Deaths are down 68%
- Nursing home cases down 96.5%
- We are rapidly approaching 70% of US population with some antibodies to COVID-19—be that from vaccines or exposure to the virus
- Latest stimulus bill will continue government and individual spending
- States are continuing to reopen
- Travel is happening again (in my family alone we’ve just booked two trips in April and one in May)
- There is a projection that 7,000,000 new jobs will be created in 2021
- Technology advanced massively in 2020 as we used it to find ways to keep ourselves (both homes and businesses) going and that does not seem to be slowing in 2021
- Corporate profits continue to climb as consumers still have pent up demand for products and services after lockdowns in 2020
I’m sure you are thinking, “But Jim, what about the stock market? All-time highs mean that a crash is coming!”
Not necessarily. At least not in 2021 and probably not 2022.
Mr. Wesbury uses an economic model called the Capitalized Markets Pricing model that takes corporate profits and divides that by assumed interest rates—namely the 10-year Treasury Bond rate.
Financial nerd alert. Stay with me.
He is using that model to predict where the S&P 500 stock market index might be at the end of the year. Stock prices are driven by corporate profits and demand for that stock.
Using 3rd Quarter 2020 corporate profits and assuming a 2% interest rate on the 10-year Treasury Bond (it is currently at 1.66%; so assuming 2% is a conservative estimate) the projection for the S&P 500 is 5,100. The S&P 500 started 2021 at 3,700.
Ending 2021 at 5,100 would mean a 37% increase!
I can hear you thinking to yourself, “I should put all my money in an S&P 500 index mutual fund and hang on for the ride!” Not necessarily. There is more to investing than seeking returns. That investment decision is not always appropriate given the amount of risk assumed.
But is there a bubble growing in the stock market? Again, not necessarily. Going back to that pricing model mentioned above we would need a massive drop in corporate profits (probably not going to happen in the short term) and or a massive increase in interest rates (again unlikely) to crash the stock market.
Massive government spending will lead to inflation and higher taxes at some point. But not in 2021 and 2022.
Again, “we all need to wait until 2023 to see what history we rhyme.”
Generally speaking, we still need to keep our eyes on the horizon, meaning the long-term.
Keep investing whether that be in your 401(k), Roth IRA, or non-qualified accounts. If these are unfamiliar terms, email us.
Pay off as much debt as you can. Being debt-free is a good thing despite what Congress thinks.
Have faith that the best is yet to come.
For more information about Brian Wesbury or to subscribe to his blog, go to the First Trust Economics blog. A weekly post he puts out is the Monday Morning Outlook—short, sweet, and good information. You can access that on the same page.