by Jason Norris, CFA
Executive Vice President
Learning to Live
One year ago, this week, Ferguson Wellman employees updated their calendars, which at that time was expected to be a temporary “work-from-home” situation.
As I write this, I am still at home. (If you are curious how our colleagues spent the year working remotely, check out our newly released annual report here.)
Panic Attack
Twelve months ago, investors were in a state of sheer panic as they were witnessing stocks freefall by over 30 percent. The uncertainty of the impact of the pandemic on the global economy was at its peak. Fortunately, policy makers on both sides of the aisle came together to enact unprecedented stimulus. With this tailwind, equities rebounded from their lows (see chart).
In the case of small-cap equities, they rallied over 100 percent. The lesson learned, and as was outlined in our 2021 Investment Outlook, is losses are only permanent if you sell. Moments like those stress-test asset allocation; however, making major decisions in the eye of the tempest can be detrimental.
Lifting Shadows
Economic growth in 2021 is likely to hit multi-decade highs. Real GDP estimates are moving up to 6-7 percent. We are seeing some estimates that are even higher, which could result in Nominal GDP above 10 percent. There are a few reasons for this acceleration. The first is vaccine distribution. The chart below highlights that close to 120 million U.S. citizens have had at least one vaccine, with over 16 percent of adults fully vaccinated.
As distribution and inoculation continues to ramp up, the U.S. economy will open. We believe there is a lot of pent-up demand for additional consumption. This is highlighted below with the amount of “dry powder” in savings accounts.
The shaded area highlights the cumulative level of savings over the last ten years. With the multiple stimulus bills (spring 2020 and winter 2020-21), individual savings is meaningfully higher than the longer-term trend. This does not include the recently signed stimulus as well. Therefore, as people become vaccinated and become more comfortable “going out,” there is an estimated $3 trillion of excess savings that may get spent. Therefore, with consumer confidence at pre-pandemic highs, people should look to start booking their holiday travel now.
Scarred
With this rapid growth in the U.S. economy, the biggest concern we are hearing about is inflation. While we do expect inflation to pick up over the next several months, this is more due to lapping the recession. While it is hard to discount trillions of dollars of fiscal stimulus, we do not think it will bring back the days of the 1970s and 1980s with respect to runaway inflation. Our sense is that a lot of investors have been scarred from that time.
When looking back at the last few decades, inflation has remained relatively tame. Even during the “dot-com bubble,” the $140 oil of the 2000s and, most recently, 3.5 percent unemployment, inflation remained muted. We believe that over the next several quarters inflation will remain in close proximity to the Federal Reserve’s target range of 2 percent.
Week in Review and Our Takeaways:
Stocks finished the week lower with technology and energy shares leading the way down
While we will see some pick-up in inflation over the next few months, we are confident that it will not be of concern to the Federal Reserve, and if it were to be, the Fed has the tools to mitigate its rise